Eze Castle Integration

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Hedge Fund SEC Examination Preparation: Part Two

By Mary Beth Hamilton,
Tuesday, December 21st, 2010

Last week, we discussed some types of information a hedge fund can expect the SEC to request during a routine examination. We looked at the General Information, Compliance Program, Risk Management & Internal Controls, and Investment Activities sections. In Part Two, we’ll dive into the Portfolio Management, Broker Arrangement, Conflicts of Interest and/or Insider Trading, Performance Advertising and Marketing, and Financial Records categories.

*Note, the information provided in this article is based on SEC documentation, including SEC Form 2389 and SEC Form 1661, and does not constitute Eze Castle Integration legal or investment advice.* 

Now without further adieu, here are the remaining types of information you can expect to produce during an SEC routine examination:

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Portfolio Management

  • The names of all securities held in client portfolios as of a given date including the aggregate market value, the aggregate number of shares or principal and/or notional amount held, the name of each client holding an interest, and the amount owned by each client for each position.

  • Detailed minutes from any investment or portfolio management committee meetings.

  • Names of public companies for which the hedge fund’s employees serve as officers or directors. Be sure to include each employee’s name as well.

  • Names of the companies for which the hedge fund’s employees serve on creditors’ committees. Again, be sure to include the names of those employees.

  • The firm’s ten most profitable and ten least profitable investment decisions, based on total return. The purchase date, sale date, and amount of gain or loss should be included as well.

  • A copy of the firm’s policy on proxy voting.

Brokerage ArrangementsSEC seal

  • A list of approved broker-dealers.

  • Minutes and any other documentation generated from brokerage review committee meetings.

  • A list of all soft-dollar arrangements the firm was involved with during the inspection period.

  • A list of commission-sharing arrangements, including the name of the broker-dealer and the total amount allocated to each arrangement.

  • Securities in which the fund was a market maker.

  • Securities for which the fund acted as an underwriter.

  • Procedures for addressing trade errors.

Conflicts of Interest and/or Insider Trading

  • The firm’s Code of Ethics and insider trading policies.

  • Reports of securities transactions by access persons.

  • Any fee-splitting or revenue-sharing arrangements.

Performance Advertising and Marketing

  • Pitch books, one-on-one presentations, pamphlets, brochures and any other marketing materials given to existing or prospective clients.

  • Advertisements used to inform or solicit clients, including any information that is available to prospects online (i.e. websites, blogs, etc.)

  • If the website contains sections that are only accessible to individuals with a username and password, create temporary login information for the SEC to use during examination.

  • All performance composites and the accounts included in each.

  • All accounts not included in a composite.

  • All terminated composites.

  • Parties that were compensated for soliciting clients on the firm’s behalf, including all agreements, correspondence, and separate disclosure documents associated with third party solicitors.

  • All completed RFPs.

  • Documentation that proves the fund is in compliance with the Global Investment Performance Standards (GIPS), if applicable.

Financial Records

  • Balance sheet, trial balance, income statement, and cash flow statements as of the most recent fiscal year end.

  • Cash receipts and disbursements journal.

  • General ledger and chart of accounts.

  • Any loans or sales of the firm’s stock to clients.

As you can see, the SEC expects a firm to provided extensive information during an audit so it is important for a hedge fund to construct its operations and systems in a way that fulfill SEC expectations.

Following are a few related articles:

We've also published a presentation that encapsulates the items covered over the past two articles. Be sure to check it out!

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Categorized under: Hedge Fund Due Diligence  Business Continuity Planning  Hedge Fund Operations  Hedge Fund Regulation 



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