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SEC Deadline Looms For Hedge Fund Advisors

by Carla Johnson, Investors

22 November 2005

Time is running out for hedge fund advisors to get ready for SEC registration by the February 2006 deadline, warns SEI, a leading global provider of asset management services and investment technology solutions.

In a recent web seminar hosted by the SEI Knowledge Partnership, regulatory experts voiced concern that hedge fund advisors may be underestimating the preparation needed in advance of registering.

The SEI panelists also cautioned fund and advisor Chief Compliance Officers to allow sufficient lead time for preparation of the first mandatory annual review of their adopted compliance programs. Most CCOs are due to submit that review in March 2006.

"Filling out Form ADV is the least of the registration process," said Jim Volk, Chief Accounting Officer and Chief Compliance Officer for SEI's Investment Manager Services business. "What takes time is developing the policies and procedures hedge funds must have to operate in a regulated environment. That is a profound change, and advisors who haven't already geared up for it may find themselves scrambling."

Volk urged hedge fund advisors to work on the assumption that they could be subject to an SEC exam any time after February 1st. "When the SEC arrives, they will expect to see that since February 1, 2006 you've been conducting your business in a manner consistent with their requirements," he emphasized. Volk also said a hastily assembled registration application could be a red flag inviting even closer SEC scrutiny.

Discussing what mutual fund CCOs must do to prepare for their first compliance program review and update, seminar panelists said ample lead time will be needed to:

  • Develop and implement adequate monitoring and testing procedures.
  • Meet with their board or board chairperson to assess expectations of the annual review and identify "hot-button issues" that should receive attention.
  • Conduct a risk assessment to identify areas of low, medium, and high non-compliance risk.
  • Contact service providers to discuss the substance and timing of their compliance reports, which are to be folded into overall programs.

"Remember, the SEC isn't looking for perfection; it's more about process," commented Tom Harman, Partner - Investment Management Practice Group, Morgan, Lewis & Bockius, LLP. "The SEC wants to know that you have a systematic process for identifying where compliance has fallen short, analyzing what went wrong, and taking steps to prevent those problems from recurring."

The SEI session also highlighted issues that should be among top compliance priorities for 2006, including e-mail retention, omnibus transparency rules, pending soft-dollar rules, and anticipated point of sale disclosure requirements.

"On all of these issues, it boils down to one message," said Paul Schaeffer, Director of the SEI Knowledge Partnership. "Don't get so wrapped up in the nuts and bolts of regulation that you ignore how new or pending rules will affect your business, or how you must change the ways you operate in order to be in compliance. As with icebergs, the biggest worry is often what lies below the surface."

The SEI Knowledge Partnership provides SEI's investment manager clients with actionable business intelligence on issues in the areas of compliance; business operations and outsourcing; marketing, sales, distribution, and client service; and business strategy. Through ComplianceAdvantage, SEI offers comprehensive compliance services, guidance, and one-on-one support.

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