The SEC is getting Serious

On Wednesday April 9, 2011 I was invited to the “Hedge funds” seminar hosted by K&L Gates.  The discussion was primarily driven around how the SEC will conduct exams of “private funds”.  The prestigious panel of seasoned and knowledge individuals included:

•   James Capezzuto – Associate  Director, Securities Exchange Commission
•   Lisa Conrad  - Chief Compliance Office and Deputy GC, Angelo Gordon & Co.
•   Gary DeWall - Group General Council Newedge USA, LLC
•   Bruce Karpati – Co-Chief, Asset Management Unit , SEC Enforcement Division
•   Stephen Crimmins – Partner, K&L Gates LLP
•   Beth Kramer -  Partner, K&L Gates LLP
•   Amy Poster  - Senior Advisor – Audit, US Department of Treasury, Office of the Special Inspector General Troubled Asset Relief Program

Bruce and Jim of the SEC indicated that they have hired at least 10 experts in the New York office to assist in the exams and enforcement inquires.  The individuals include experts in the following areas; portfolio manager of a hedge fund; analyst,  trader, quant, structurer of  products .  The move towards hiring experts indicates that the SEC is serious about understanding the alternative asset management industry and conducting a more in-depth targeted exam .  As I previously stated in my Blog, the SEC is hiring smart people who know your business.

 

How the SEC will conduct exams

Jim Capezzuto indicated that during the exam, there will be more communication between the exam and enforcement divisions.  In fact Jim and Bruce indicated that in certain instances an enforcement unit member could join the exam unit in the field.  The examiners will update the enforcement unit on issues as they arise and will not wait until the end of the exam.  In this way, the SEC can work together with the member firm to obtain more information regarding any issue(s) that arise and the SEC can make a quicker more informed determination of whether an enforcement action needs to be initiated.

Jim and Bruce also indicated that at least 60 individuals from the insider trading unit will or have already been transferred to the “funds” division to handle the anticipated increase  in exams. 

Jim indicated that each exam will be “scoped individually”.  The exam will be conducted with an emphasis on the risk profile of the firm and be be initially scoped based on the information provided by the member firm through quarterly or annual filings.  The internal governance, control environment and transparency of the member firm will be of interest and a top down approach of examining the member firm will be employed.   

Interviews of key individuals will take place and based on the results of these interviews and documentation provided by the member firm, the SEC examiners will determine which areas of the business or infrastructure they will drill down into.

Tomorrow I will write the second part of this post.  This will include new initiatives at the SEC, the SEC's view of outsourcing the compliance department of member firms and the importance of internal controls.   

Keep reading. 

Cost and Timing of Filing the proposed Form PF

 GAO's estimated cost of filing the form PF

The General Accounting Office has determined that the cost of the first year of filing the form PF for all registered hedge funds, liquidity funds and private equity firms will cost over $30,0000,000 in man hours spent.  However, this does not include any costs associated with bringing the infrastructure to a level where information can be easily obtained.  It also does not include any cost consideration for a firm to establish the requested goverance standards or additonal compliance necessary to ensure that the hedge fund meets present and future requirements.    

Timing of filing Form PF

Currently, the SEC anticipates that the proposed rules requiring filing of Form PF would have a compliance date of December 15, 2011, at which time Large Private Fund Advisers would begin filing 15 days after the end of each quarter (i.e., Large Private Fund Advisers would need to make their initial Form PF filing by January 15, 2012).  According to the SEC, this timing should allow sufficient time for Large Private Fund Advisers to develop systems for collecting the information required on Form PF and prepare for filing. 

The SEC is proposing that the rules allow smaller private fund advisers until 90 days after the end of their first fiscal year occurring on or after the compliance date of the proposed rule to file their first Form PF (with the expectation that this would result in smaller private fund advisers with a December 31 fiscal year end filing their first Form PF by March 31, 2012) because the SEC anticipates that some of these advisers may require more time to prepare for their initial Form PF filing and so that the first group of private fund advisers filing Form PF would all be reporting based generally on information as of December 31, 2011.

Hedge Funds need to Register

It was reported that nearly a third of billion dollar plus hedge funds have not  yet filed with the SEC.  The last possible date to register with the SEC for hedge funds with assets under management  of 150 million or more  is July 21, 2011.  

This does not give these firms much time.  For Firms with assets over 1 billion, they must file an ADV Form PF on a quarterly basis.  The information required to be filed is very detailed.  However the SEC under rule 204b-1 says that the information requested  will not be made public.

"Form PF would elicit non-public information about private funds and their trading strategies the public disclosure of which, in many cases, could adversely affect the funds and their investors. The SEC does not intend to make public Form PF information identifiable to any particular adviser or private fund, although the SEC may use Form PF information in an enforcement action."

However, it the hedge funds do not want to divulge proprietary information if they can avoid it. 

Attached is a URL to the PF Form that needs to be filed either quarterly or annually.

http://www.sec.gov/rules/proposed/2011/ia-3145.pdf

Principles and best Practices for Hedge fund investor

Investors are requiring more timely, robust and transparent information from the fund managers.  For an investor to confidently contribute to a fund, the trend is not only performance but transparency of information.

All funds supply investor, information, but at a minimum, the investor package should include: extracted from the president’s working group on Financial markets issued white paper on “Principles and best Practices for Hedge fund investors”

• ·         Long and short positions by geographic regions or strategy, including hedges
• ·         Most significant "winners and losers"
• ·         Assets under management (by fund)
• ·         Portfolio statistics (i.e., turnover, long positions, short positions, etc.)
• ·         A statement of the investor’s investment in the hedge fund, a letter discussing performance, and a report of the performance net of fees and expenses 
• ·         A statement of the asset valuations for any period in which the hedge fund manager received performance-based compensation and the percentage allocation of FAS 157 Level 1, 2, and 3 categories and Tax exposure for the investors