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Preparing for an SEC Examination: Requested Information Part One

By Mary Beth Hamilton | Thursday, December 16th, 2010

We’ve held a number of events recently on hedge fund due diligence and one common question centers on the SEC’s examination process. Specifically, we hear a lot of hedge funds asking about the process the SEC examiners follow when conducting an examination of an Advisor under the Investment Advisers Act of 1940.

For this article we’ll focus on an SEC routine examination, which is typically scheduled based on the passage of time since a hedge fund has been examined.  *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.*

A SEC routine examination typically starts with a review of the hedge fund’s business and investment activities and its compliance policies and procedures.  The SEC also often asks to speak with the hedge fund’s employees to ensure an understanding of the firm’s business and operations. From there, the SEC assesses whether the hedge fund’s policies and procedures effectively address the firm’s compliance risks.

The type of information requested by the SEC during a hedge fund routine examination often includes:

  • General information about the hedge fund, such as org charts, data on advisory clients and trade blotter. hedge fund sec audit The goal of reviewing this information is to gain an understanding of the firm’s business and investment activities.

  • Details on the hedge fund’s compliance risks as well as the written policies and procedures the firm has established to address those risks. For example, the SEC will want to see any inventory performed of the firm’s compliance risks.

  • Documentation of the firm’s compliance testing to understand how effectively the hedge fund has executed its compliance policies.

  • Information on any actions taken as a result of compliance testing.

Here is a more detailed outline of the type of information you can expect to produce during an SEC routine examination:

General Information

  • Organization chart showing ownership percentages and control persons.

  • Names of firm’s officers and/or directors who resigned during the examination period.

  • Names of employees who were disciplined or terminated during the examination period.

  • Current standard client advisory contracts or agreements.

  • Current fee structure

  • Names and locations of service providers, the services they perform and information about the due diligence process to select and monitor the providers.

Compliance Program, Risk Management & Internal Controls

  • Compliance policies and procedures in effect during examination period.Disaster Recovery Guidebook

  • Information on hedge fund’s compliance testing, including compliance reviews, quality control analyses, surveillance and/ transactional test performed by the firm.

  • Current inventory of firm’s compliance risks.

  • Written guidance that has been provided to employees regarding compliance risk assessment process

  • Information about oversight process the firm uses for any remote offices.

  • Any client complaints.

  • Names of all pricing services, quotation services and externally-acquired portfolio accounting systems used in the valuation process.

  • Names of all fair-valued and illiquid securities held by clients, a description of any fair value process employed and all fair value reports prepared or reviewed by a valuation committee.

  • Supporting documentation for the most recent advisory fee calculation.

  • Firm’s business continuity plan (BCP) and documentation regarding the results of the firm’s most recent test of its business continuity plan. *Note, Eze Castle Integration can help you create a BCP.

Investment Activities

  • A trade blotter that lists transactions in securities and other financial instruments for current and former clients. Details on proprietary and/or trading accounts should also be included.

The list goes on, but we’ll stop here and continue the list of information requested during an SEC examination in our Part 2 article. The SEC examination areas we’ll cover include:

  • Portfolio management,

  • Brokerage arrangements,

  • Conflicts of interest/insider trading, and

  • Performance advertising and marketing.

In the meantime, we'd be happy to discuss the SEC examination preperation process and the role of technology.  Also, be sure to visit our Hedge Fud Operational Due Diligence Knowledge Center.

hedge fund due diligence knowledge centercontact eze

Photo Credit: Istock


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