SEC Official Provides Checklist for Newly Registered Hedge Fund Advisers

Hedge fund advisers newly registered with the SEC pursuant to the mandate of the Dodd-Frank Act should undertake a comprehensive review of their operations to identify any gaps in their control and compliance policies and procedures, noted Norm Champ, Deputy Director, SEC Office of Compliance Inspections and Examinations. In recent remarks before the New York City Bar, he also advised hedge fund advisers to update their policies and procedures when there are changes in the firm’s activities or products. They should also assign responsibility to specific persons for maintaining the procedures. In addition to reviewing policies and procedures annually, which is required under Advisers Act Rule 206(4)-7, the SEC official urged hedge fund advisers to periodically test and verify procedures. For example, they should test and verify valuation procedures for consistency, especially for complex or illiquid securities.

Title IV of the Dodd-Frank Act eliminated the private adviser exemption and required hedge fund and other private fund advisers to register with the Commission. The staff has been monitoring the Form ADV applications of new advisers as they have been filed, noted the Deputy Director, and believes that 48 of the 50 largest hedge fund advisers in the world are now registered with the SEC.

In addition, hedge funds and other private equity funds with at least $150 million in assets under management must file a new Form PF. The information reported in Form PF will be used by the Financial Stability Oversight Council to monitor risks to the U.S. financial system and by the SEC to conduct risk assessments of private fund advisers. All investment advisers required to file a Form PF must provide basic information in Sections 1a and 1b.


Large private fund advisers must provide more detailed information than smaller advisers. Most hedge fund advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. Hedge fund advisers, with at least $5 billion in assets under management attributable to hedge funds, must begin filing Form PF following the end of their first fiscal year or quarter, as applicable, to end on or after June 15, 2012.

Smaller hedge fund advisers will be required to file only annually within 120 days of the end of their fiscal year. Large hedge fund advisers will be required to file quarterly, within 60 days after the end of each fiscal quarter.

Form PF may require voluminous data, cautioned the Deputy Director, and hedge fund advisers may find that they do not maintain or collect all of the information that is required. Much of the information may be located in various places throughout the firm and some effort may be required to collect and report the information. He thus suggested that hedge fund advisers begin now to identify the sources within the business where the data resides, determine how best capture such data, collect and compile the data, and assure its accuracy.

Continuing down his checklist, the SEC official more broadly urged hedge fund advisers to identify risk and brainstorm any factors that create risk exposure for their clients and their firms. They should also ensure that their employees are knowledgeable about their work and that the adviser has sufficient expertise to oversee what goes on. Hedge fund advisers should continue to update and train their employees about new rules and procedures applicable to the firm and its products.

The Deputy Director asked hedge fund advisers to be aware that SEC examiners may verify some or all of their assets and could reach out to third parties and possibly clients in this process. In this regard, hedge fund advisers should make sure that their organization has done adequate due diligence in connection with third parties, including consultants and service providers.

The official urged hedge fund adviser to get rid of silos and open communication among divisions and offices where appropriate and legally possible. While aware that in some situations barriers between certain areas of a firm are required legally, he asked hedge fund advisers to identify any situations where their interests may conflict with those of their clients and ensure that these conflicts are managed and disclosed.

Similarly, hedge fund advisers should to ensure that they have made complete and accurate disclosure about performance, arrangements, fees, affiliates and affiliated transactions. Importantly, now that the JOBS Act permits general solicitation under Regulation D, said the official, hedge fund advisers should review marketing documents, client communications and questionnaire responses to ensure information is accurate and not misleading. They should also verify that fees are calculated correctly and accurately disclosed. The advisers should make sure that they can trust the information, both external and internal, upon which they rely.

Hedge fund advisers should also review client account holdings for appropriateness and review trades for unusual performance relative to peers and markets. They should also compare trades to restricted lists and determine if trades were made ahead of publicly available news or research reports.

With regard to complaints, hedge fund advisers should ensure that their procedures provide adequate instructions on handling them, and they should follow up to make sure that they have been resolved. The final item on the SEC official’s checklist is for hedge fund advisers to check their IT security to ensure that clients’ assets and information are not at risk.