Hedge Fund Compliance Consultants
Private and hedge fund compliance regulations are similar than those of Registered Investment Advisers. On July 21, 2010, President Obama signed into law the Dodd Frank Act, which among other things, repealed the “private adviser exemption” contained in Section 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”) under which advisers to many hedge funds, private equity funds and other private funds (collectively referred to as “private funds”) relied upon to avoid registration.
Originally, Section 203(b)(3) exempted any investment adviser from registration if the investment adviser:
- had fewer than 15 clients in the preceding 12 months (each hedge fund advised by an adviser typically qualified as a single client for purposes of the private adviser exemption),
- did not hold itself out to the public as an investment adviser, and
- did not act as an investment adviser to a registered investment company or a company that has elected to be a business development company.
By March 30, 2013, any private and hedge fund advisers with over $150 million in regulatory assets under management (“RAUM”) were required to register with the SEC, or, if under $150 million in RAUM or a venture capital fund adviser, file as an exempt reporting adviser.
Now, private hedge fund advisers are exempt from registration only if they:
- Act solely as an investment adviser to one or more qualifying private hedge funds; and
- Manage private hedge fund assets of less than $150 million.
There are additional exemptions for foreign hedge fund advisers that do not have U.S.-based clients.
All advisers, including private hedge fund managers, registered with the SEC are subject to the Investment Advisers Act. Below is a quick summary to ensure full compliance as it relates to hedge fund compliance.
- First, appoint a Chief Compliance Officer, who will be responsible for administering, monitoring and enforcing the hedge fund adviser’s policies and procedures.
- Prepare a Risk Assessment outlining the potential risks imposed in doing business as a private fund adviser and the controls in place to mitigate those risks. This step ties into the preparation of your policies and procedures and your Annual Review.
- Prepare policies and procedures that are developed to mitigate the potential risks of the adviser. Make sure they are specific to the firm; beware of boiler plate procedures and do not write procedures that will not be followed. At a minimum, the document must include policies and procedures on (where applicable):
- Portfolio management processes
- Trading practices
- Proprietary trading of the adviser and personal trading activities of supervised persons
- The accuracy of disclosures made to investors, clients, and regulators including statements and advertisements
- Safeguarding of client assets from conversion or inappropriate use by advisory personnel
- The accurate creation of required records and their maintenance secure from unauthorized alteration, use, or destruction
- Marketing advisory services, including the use of solicitors
- Processes to value client holdings and assess fees based on those valuations
- Protection for the privacy of client records and information
- Business continuity plans
- Proxy voting policies and procedures
- Preventing the use of political contributions to influence government officials responsible for the hiring the investment adviser
- Processes to identify suspect accounts or transactions and report to them to OFAC
- Policies and procedures specific to private funds such as General Solicitation Rule, Bad Actor’s Rule, and Regulation D.
- Prepare a Code of Ethics in compliance with Rule 204A-1. This is one the SEC takes literally and must be consistent with the Rule’s specific requirements.
- Prepare, maintain and deliver ADV Part 2A and 2B
- Update subscription agreements and PPMs to be in compliance
- Fund and file ADV Part 1A and 2A via IARD website for registration with the SEC
- Update marketing materials to be in compliance with the Rule 206(4)-1 of the Advisers Act. This includes the firm’s website.
- VERY IMPORTANT: Ensure consistency and full disclosure in all documents, this includes the policies and procedures, code of ethics, ADV Part 1, ADV Part 2A, ADV Part 2B, subscription agreements, PPMs, and marketing materials.
- Maintain books and records in accordance with Rule 204-2 of the Advisers Act. Generally speaking, all records should be maintained for a period of 5 years, however, there are some that must be maintained longer (e.g. performance related information, organizational documents). You will also want to establish procedures for maintaining electronic records (e.g. email).
- Establish a calendar for your Annual Review. Although the SEC has not specifically stated the timing of these reviews, it is highly recommended and best practice to incorporate reviews/testing on a regular basis (e.g. quarterly)
Our New Adviser Setup Service assists with items 3 through 5.