CHICAGO (HedgeWorld.com)–It turns out the Securities and Exchange Commission’s big push to require hedge fund managers to register as investment advisers was more than just a show.
Recently the commission has been proactive, seeking written information and documents from registered advisers in advance of scheduling inspection visits to those advisers’ offices. Anecdotal evidence suggests that since the Feb. 1 registration deadline, the SEC has initiated examinations of least a dozen, perhaps more, hedge fund managers, figures an SEC spokesman declined to verify.
Using its list of newly registered managers, the SEC recently sent out a 17-page “sweep” letter to some hedge fund managers asking for volumes of specific information pertaining to compliance programs, business and operations, portfolio management, ethics and personal trading, brokerage arrangements and trade execution, trade allocation, performance advertising and marketing, information disclosure, safety of client funds and assets, portfolio pricing, and individual fund information.
The period covered by the request spans 26 months, from Jan. 1, 2004 through March 31 of this year.
One hedge fund attorney, who was granted anonymity out of concern his on-the-record comments could harm clients who might be subject to the sweep, said he was struck by the scope of the SEC’s inquiry and added that producing some of the information and preparing for the inspection would be time consuming for advisers. “This letter is extremely comprehensive,” the attorney said. “The thing is, it’s everything. Everything possible is in here. It’s going to be a massive undertaking for the chief compliance officer and the principals of the fund from the time they receive the request to the time the SEC sets foot in the door.”
The attorney said he understood that at least a dozen hedge fund advisers had received letters, all similar in scope and tone, and that the SEC was using the process to refine its hedge fund examination and inspection program.
John Nester, director of public affairs at the SEC, said the letters are sent as a way to initiate the examination process for registered investment advisers. Previously, the SEC did not have the authority to conduct such examinations of many hedge funds because they were not required to be registered with the commission. But new rules that passed in 2004 and took effect Feb. 1 required most hedge fund managers to register with the SEC as investment advisers. That opened the door to conducting examinations.
Mr. Nester said the information the letters ask for is based on previous familiarity with hedge funds, but the queries are always evolving in response to the SEC’s risk analysis and are tailored to specific entities. “We’ve done extensive training over the past year and will continue to do so,” Mr. Nester said of the SEC’s hedge fund inspections.
Last year, the SEC sent out a six-page mini-sweep letter with a 22-item checklist of information the commission wanted to collect. This latest letter is three times as long.
Reading through the letter, hedge fund managers could be forgiven if they feel as if the SEC is challenging them to prove they aren’t doing anything wrong.