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Guide to SEC Registration
for
Private Fund Investment Advisers
Pursuant to the Private Fund Investment Advisers Registration Act of 2010
The guide was prepared by SEC Compliance Consultants Inc in response to the July
21
st
2010 passage of the Private Fund Investment Advisers Registration Act of 2010(ldquothe Registration Actrdquo) which is part of the larger Dodd-Frank Wall Street Reform and
Consumer Protection Act The Registration Act has significant implications for many
currently unregistered US and non-US advisers of private funds
July 21st
2010
Disclaimer SEC Compliance Consultants Inc is not a law firm and does not provide legal advice This document should
not be considered legal advice on any subject matter The information contained in this document is presented withoutany warranty or representation as to its accuracy or completeness or whether it reflects the most current regulatory
developments This document is provided for general information purposes only Further distribution of this document is
permitted so long as its distribution is solely for the purposes discussed in this disclaimer and consequently the
distributing party cannot be held liable for its accuracy or completeness or whether it reflects the most current
regulatory developments
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 2
Table of Contents
Private Fund Investment Advisers Registration Act of 2010 3
Implications for Investment Advisers to Private Funds 6
Compliance Rule - Advisers Act Rule 206(4)-7 7
Registration Process 10
Form ADV - Disclosure Requirements 10
Associated Costs 15
Life after Registration 16
Contact Information 19
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Private Fund Investment Advisers Registration Act of 2010
Today July 21st 2010 the President signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act which includes in Title IV the Private Fund Investment
Advisers Registration Act of 2010 (the ldquoRegistration Actrdquo) The Registration Act among
other things amends the Investment Advisers Act of 1940 (the Advisers Act) and has
significant implications for advisers to both US and non-US domiciled private funds
The Registration Act eliminates the exemption from registration with the Securities and
Exchange Commission (ldquoSECrdquo) for private fund advisers who have fewer than 15 clients
and do not hold themselves out to the public as investment advisers Consequently
unless an investment adviser to a private fund qualifies for another exemption they will
be required to register with the SEC
The Registration Act provides for new exemptions and certain exclusions from SEC
Registration These are as follows
Private Fund Advisers with AUM Less than $150 million Exempt from SEC
registration are investment advisers that advise only private funds 1
Foreign Fund Advisers Exempt from registration are ldquoforeign fundadvisersrdquo defined as an adviser that (i) has no place of business in the
United States (ii) has fewer than 15 clients and investors in the United
States in private funds (iii) has aggregate AUM attributable to investors in
the United States of less than $25 million and (iv) does not hold itself out to
the public in the United States as an investment adviser
and
have AUM less than $150 million
Family Offices Excluded from the definition of an investment adviser is any
family office The SEC is to define ldquofamily officerdquo although the SEC must be
consistent with previous exemptive policy and must also include a
grandfathering provision effective January 1 2010
1ldquoPrivate Fund is defined as an issuer that relies upon the exclusion from the definition of
investment company provided for in Sections 3(c)(1) or 3(c)(7) of the Investment Company Actof 1940
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Venture Capital Advisers Exempt from registration are investment
advisers who advise solely ldquoventure capital fundsrdquo However advisers who
qualify for this exemption will have a recordkeeping and reporting
obligation Both the definition of a ldquoventure capital fundrdquo and the exact
recordkeeping and reporting requirements are to be defined by the SEC
Commodity Trading Adviser Exempt from registration are advisers
registered with the Commodities Futures Trading Commission (ldquoCFTCrdquo) as
long as the CFTC registered adviser advises a private fund and is not
predominately providing securities-related advice
The Registration Act introduces the term ldquoMid-Sized Private Fund Advisersrdquo although it
is not defined The Registration Act directs the SEC to develop specific registration and
examination procedures for investment advisers to mid-sized private funds based on
whether a mid-sized private fund poses systemic risk after taking into account their size
governance and investment strategies Presumably the SEC will define Mid-Sized
Private Fund Advisers and develop rules regarding specific registration and examination
procedures of such mid-sized private fund advisers State regulations and applicability
may vary and will need to be assessed as well
The Registration Act also affects ldquoMid-Sized investment Advisersrdquo by effectively raising
the minimum threshold for SEC registration from $25 million to $100 million As such
these effected advisers with assets under management ranging from $25 million to $100
million will now be forced to shift their registration from the SEC to the states unless (i)
the investment adviser is not required to be registered with the state securities
regulator in the state where they maintain their principal office and place of business
and (2) would not be subject to examination as an investment adviser by such state
regulator
The Registration Act also addresses both the ldquoaccredited investorrdquo standard and the
ldquoqualified clientrdquo standard The accredited investor standard is immediately adjusted
upon enactment to exclude the value of a natural personrsquos primary residence from the
$1 million net worth threshold The standard would apply to new investors and tocurrent investors making additional purchases In addition after the first four years
there is a provision for the SEC to adjust the standard Within the first year of the
Registration Actrsquos enactment the SEC is required to adjust the ldquoqualified clientrdquo
standard for inflation and every five years thereafter
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The Registration Act deems the records and reports of private funds advised by an
investment adviser registered under the Registration Act to be records and reports of
the investment adviser It also allows the SEC to require registered and unregistered
investment advisers to maintain certain records of and file with the SEC such reports
regarding private funds advised by the investment adviser as necessary and
appropriate in the public interest and for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight Council (ldquoCouncilrdquo) As
well both registered and unregistered advisers to private funds will be required by the
SEC to maintain with respect to each private fund advised a description of
bull assets under management and leverage
bull counterparty credit risk exposure
bull trading and investment positions
bull valuation policies and practices
bull types of assets held
bull side arrangements or side letters
bull trading practices and
bull other information that the SEC deems necessary and appropriate in the
public interest and for the protection of investors and the assessment of
systemic risk
All reporting to the SEC in accordance with the Registration Act will be expressly exempt
from public disclosure pursuant to the Freedom of Information Act although the SEC
will be authorized to share the information with the Council and other government
agencies All agencies receiving the information will also be required to keep all
information confidential
The Registration Act becomes effective one year following the date of enactment
although Investment advisers to private funds may voluntarily register with the SEC
during this one year period During the next twelve months the SEC will be active
promulgating numerous rules and providing clarification
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
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Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Table of Contents
Private Fund Investment Advisers Registration Act of 2010 3
Implications for Investment Advisers to Private Funds 6
Compliance Rule - Advisers Act Rule 206(4)-7 7
Registration Process 10
Form ADV - Disclosure Requirements 10
Associated Costs 15
Life after Registration 16
Contact Information 19
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Private Fund Investment Advisers Registration Act of 2010
Today July 21st 2010 the President signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act which includes in Title IV the Private Fund Investment
Advisers Registration Act of 2010 (the ldquoRegistration Actrdquo) The Registration Act among
other things amends the Investment Advisers Act of 1940 (the Advisers Act) and has
significant implications for advisers to both US and non-US domiciled private funds
The Registration Act eliminates the exemption from registration with the Securities and
Exchange Commission (ldquoSECrdquo) for private fund advisers who have fewer than 15 clients
and do not hold themselves out to the public as investment advisers Consequently
unless an investment adviser to a private fund qualifies for another exemption they will
be required to register with the SEC
The Registration Act provides for new exemptions and certain exclusions from SEC
Registration These are as follows
Private Fund Advisers with AUM Less than $150 million Exempt from SEC
registration are investment advisers that advise only private funds 1
Foreign Fund Advisers Exempt from registration are ldquoforeign fundadvisersrdquo defined as an adviser that (i) has no place of business in the
United States (ii) has fewer than 15 clients and investors in the United
States in private funds (iii) has aggregate AUM attributable to investors in
the United States of less than $25 million and (iv) does not hold itself out to
the public in the United States as an investment adviser
and
have AUM less than $150 million
Family Offices Excluded from the definition of an investment adviser is any
family office The SEC is to define ldquofamily officerdquo although the SEC must be
consistent with previous exemptive policy and must also include a
grandfathering provision effective January 1 2010
1ldquoPrivate Fund is defined as an issuer that relies upon the exclusion from the definition of
investment company provided for in Sections 3(c)(1) or 3(c)(7) of the Investment Company Actof 1940
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Venture Capital Advisers Exempt from registration are investment
advisers who advise solely ldquoventure capital fundsrdquo However advisers who
qualify for this exemption will have a recordkeeping and reporting
obligation Both the definition of a ldquoventure capital fundrdquo and the exact
recordkeeping and reporting requirements are to be defined by the SEC
Commodity Trading Adviser Exempt from registration are advisers
registered with the Commodities Futures Trading Commission (ldquoCFTCrdquo) as
long as the CFTC registered adviser advises a private fund and is not
predominately providing securities-related advice
The Registration Act introduces the term ldquoMid-Sized Private Fund Advisersrdquo although it
is not defined The Registration Act directs the SEC to develop specific registration and
examination procedures for investment advisers to mid-sized private funds based on
whether a mid-sized private fund poses systemic risk after taking into account their size
governance and investment strategies Presumably the SEC will define Mid-Sized
Private Fund Advisers and develop rules regarding specific registration and examination
procedures of such mid-sized private fund advisers State regulations and applicability
may vary and will need to be assessed as well
The Registration Act also affects ldquoMid-Sized investment Advisersrdquo by effectively raising
the minimum threshold for SEC registration from $25 million to $100 million As such
these effected advisers with assets under management ranging from $25 million to $100
million will now be forced to shift their registration from the SEC to the states unless (i)
the investment adviser is not required to be registered with the state securities
regulator in the state where they maintain their principal office and place of business
and (2) would not be subject to examination as an investment adviser by such state
regulator
The Registration Act also addresses both the ldquoaccredited investorrdquo standard and the
ldquoqualified clientrdquo standard The accredited investor standard is immediately adjusted
upon enactment to exclude the value of a natural personrsquos primary residence from the
$1 million net worth threshold The standard would apply to new investors and tocurrent investors making additional purchases In addition after the first four years
there is a provision for the SEC to adjust the standard Within the first year of the
Registration Actrsquos enactment the SEC is required to adjust the ldquoqualified clientrdquo
standard for inflation and every five years thereafter
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The Registration Act deems the records and reports of private funds advised by an
investment adviser registered under the Registration Act to be records and reports of
the investment adviser It also allows the SEC to require registered and unregistered
investment advisers to maintain certain records of and file with the SEC such reports
regarding private funds advised by the investment adviser as necessary and
appropriate in the public interest and for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight Council (ldquoCouncilrdquo) As
well both registered and unregistered advisers to private funds will be required by the
SEC to maintain with respect to each private fund advised a description of
bull assets under management and leverage
bull counterparty credit risk exposure
bull trading and investment positions
bull valuation policies and practices
bull types of assets held
bull side arrangements or side letters
bull trading practices and
bull other information that the SEC deems necessary and appropriate in the
public interest and for the protection of investors and the assessment of
systemic risk
All reporting to the SEC in accordance with the Registration Act will be expressly exempt
from public disclosure pursuant to the Freedom of Information Act although the SEC
will be authorized to share the information with the Council and other government
agencies All agencies receiving the information will also be required to keep all
information confidential
The Registration Act becomes effective one year following the date of enactment
although Investment advisers to private funds may voluntarily register with the SEC
during this one year period During the next twelve months the SEC will be active
promulgating numerous rules and providing clarification
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
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Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Private Fund Investment Advisers Registration Act of 2010
Today July 21st 2010 the President signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act which includes in Title IV the Private Fund Investment
Advisers Registration Act of 2010 (the ldquoRegistration Actrdquo) The Registration Act among
other things amends the Investment Advisers Act of 1940 (the Advisers Act) and has
significant implications for advisers to both US and non-US domiciled private funds
The Registration Act eliminates the exemption from registration with the Securities and
Exchange Commission (ldquoSECrdquo) for private fund advisers who have fewer than 15 clients
and do not hold themselves out to the public as investment advisers Consequently
unless an investment adviser to a private fund qualifies for another exemption they will
be required to register with the SEC
The Registration Act provides for new exemptions and certain exclusions from SEC
Registration These are as follows
Private Fund Advisers with AUM Less than $150 million Exempt from SEC
registration are investment advisers that advise only private funds 1
Foreign Fund Advisers Exempt from registration are ldquoforeign fundadvisersrdquo defined as an adviser that (i) has no place of business in the
United States (ii) has fewer than 15 clients and investors in the United
States in private funds (iii) has aggregate AUM attributable to investors in
the United States of less than $25 million and (iv) does not hold itself out to
the public in the United States as an investment adviser
and
have AUM less than $150 million
Family Offices Excluded from the definition of an investment adviser is any
family office The SEC is to define ldquofamily officerdquo although the SEC must be
consistent with previous exemptive policy and must also include a
grandfathering provision effective January 1 2010
1ldquoPrivate Fund is defined as an issuer that relies upon the exclusion from the definition of
investment company provided for in Sections 3(c)(1) or 3(c)(7) of the Investment Company Actof 1940
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Venture Capital Advisers Exempt from registration are investment
advisers who advise solely ldquoventure capital fundsrdquo However advisers who
qualify for this exemption will have a recordkeeping and reporting
obligation Both the definition of a ldquoventure capital fundrdquo and the exact
recordkeeping and reporting requirements are to be defined by the SEC
Commodity Trading Adviser Exempt from registration are advisers
registered with the Commodities Futures Trading Commission (ldquoCFTCrdquo) as
long as the CFTC registered adviser advises a private fund and is not
predominately providing securities-related advice
The Registration Act introduces the term ldquoMid-Sized Private Fund Advisersrdquo although it
is not defined The Registration Act directs the SEC to develop specific registration and
examination procedures for investment advisers to mid-sized private funds based on
whether a mid-sized private fund poses systemic risk after taking into account their size
governance and investment strategies Presumably the SEC will define Mid-Sized
Private Fund Advisers and develop rules regarding specific registration and examination
procedures of such mid-sized private fund advisers State regulations and applicability
may vary and will need to be assessed as well
The Registration Act also affects ldquoMid-Sized investment Advisersrdquo by effectively raising
the minimum threshold for SEC registration from $25 million to $100 million As such
these effected advisers with assets under management ranging from $25 million to $100
million will now be forced to shift their registration from the SEC to the states unless (i)
the investment adviser is not required to be registered with the state securities
regulator in the state where they maintain their principal office and place of business
and (2) would not be subject to examination as an investment adviser by such state
regulator
The Registration Act also addresses both the ldquoaccredited investorrdquo standard and the
ldquoqualified clientrdquo standard The accredited investor standard is immediately adjusted
upon enactment to exclude the value of a natural personrsquos primary residence from the
$1 million net worth threshold The standard would apply to new investors and tocurrent investors making additional purchases In addition after the first four years
there is a provision for the SEC to adjust the standard Within the first year of the
Registration Actrsquos enactment the SEC is required to adjust the ldquoqualified clientrdquo
standard for inflation and every five years thereafter
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The Registration Act deems the records and reports of private funds advised by an
investment adviser registered under the Registration Act to be records and reports of
the investment adviser It also allows the SEC to require registered and unregistered
investment advisers to maintain certain records of and file with the SEC such reports
regarding private funds advised by the investment adviser as necessary and
appropriate in the public interest and for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight Council (ldquoCouncilrdquo) As
well both registered and unregistered advisers to private funds will be required by the
SEC to maintain with respect to each private fund advised a description of
bull assets under management and leverage
bull counterparty credit risk exposure
bull trading and investment positions
bull valuation policies and practices
bull types of assets held
bull side arrangements or side letters
bull trading practices and
bull other information that the SEC deems necessary and appropriate in the
public interest and for the protection of investors and the assessment of
systemic risk
All reporting to the SEC in accordance with the Registration Act will be expressly exempt
from public disclosure pursuant to the Freedom of Information Act although the SEC
will be authorized to share the information with the Council and other government
agencies All agencies receiving the information will also be required to keep all
information confidential
The Registration Act becomes effective one year following the date of enactment
although Investment advisers to private funds may voluntarily register with the SEC
during this one year period During the next twelve months the SEC will be active
promulgating numerous rules and providing clarification
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
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Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Venture Capital Advisers Exempt from registration are investment
advisers who advise solely ldquoventure capital fundsrdquo However advisers who
qualify for this exemption will have a recordkeeping and reporting
obligation Both the definition of a ldquoventure capital fundrdquo and the exact
recordkeeping and reporting requirements are to be defined by the SEC
Commodity Trading Adviser Exempt from registration are advisers
registered with the Commodities Futures Trading Commission (ldquoCFTCrdquo) as
long as the CFTC registered adviser advises a private fund and is not
predominately providing securities-related advice
The Registration Act introduces the term ldquoMid-Sized Private Fund Advisersrdquo although it
is not defined The Registration Act directs the SEC to develop specific registration and
examination procedures for investment advisers to mid-sized private funds based on
whether a mid-sized private fund poses systemic risk after taking into account their size
governance and investment strategies Presumably the SEC will define Mid-Sized
Private Fund Advisers and develop rules regarding specific registration and examination
procedures of such mid-sized private fund advisers State regulations and applicability
may vary and will need to be assessed as well
The Registration Act also affects ldquoMid-Sized investment Advisersrdquo by effectively raising
the minimum threshold for SEC registration from $25 million to $100 million As such
these effected advisers with assets under management ranging from $25 million to $100
million will now be forced to shift their registration from the SEC to the states unless (i)
the investment adviser is not required to be registered with the state securities
regulator in the state where they maintain their principal office and place of business
and (2) would not be subject to examination as an investment adviser by such state
regulator
The Registration Act also addresses both the ldquoaccredited investorrdquo standard and the
ldquoqualified clientrdquo standard The accredited investor standard is immediately adjusted
upon enactment to exclude the value of a natural personrsquos primary residence from the
$1 million net worth threshold The standard would apply to new investors and tocurrent investors making additional purchases In addition after the first four years
there is a provision for the SEC to adjust the standard Within the first year of the
Registration Actrsquos enactment the SEC is required to adjust the ldquoqualified clientrdquo
standard for inflation and every five years thereafter
8142019 Guide to SEC Registration of Hedge Funds
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The Registration Act deems the records and reports of private funds advised by an
investment adviser registered under the Registration Act to be records and reports of
the investment adviser It also allows the SEC to require registered and unregistered
investment advisers to maintain certain records of and file with the SEC such reports
regarding private funds advised by the investment adviser as necessary and
appropriate in the public interest and for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight Council (ldquoCouncilrdquo) As
well both registered and unregistered advisers to private funds will be required by the
SEC to maintain with respect to each private fund advised a description of
bull assets under management and leverage
bull counterparty credit risk exposure
bull trading and investment positions
bull valuation policies and practices
bull types of assets held
bull side arrangements or side letters
bull trading practices and
bull other information that the SEC deems necessary and appropriate in the
public interest and for the protection of investors and the assessment of
systemic risk
All reporting to the SEC in accordance with the Registration Act will be expressly exempt
from public disclosure pursuant to the Freedom of Information Act although the SEC
will be authorized to share the information with the Council and other government
agencies All agencies receiving the information will also be required to keep all
information confidential
The Registration Act becomes effective one year following the date of enactment
although Investment advisers to private funds may voluntarily register with the SEC
during this one year period During the next twelve months the SEC will be active
promulgating numerous rules and providing clarification
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
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Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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The Registration Act deems the records and reports of private funds advised by an
investment adviser registered under the Registration Act to be records and reports of
the investment adviser It also allows the SEC to require registered and unregistered
investment advisers to maintain certain records of and file with the SEC such reports
regarding private funds advised by the investment adviser as necessary and
appropriate in the public interest and for the protection of investors or for the
assessment of systemic risk by the Financial Stability Oversight Council (ldquoCouncilrdquo) As
well both registered and unregistered advisers to private funds will be required by the
SEC to maintain with respect to each private fund advised a description of
bull assets under management and leverage
bull counterparty credit risk exposure
bull trading and investment positions
bull valuation policies and practices
bull types of assets held
bull side arrangements or side letters
bull trading practices and
bull other information that the SEC deems necessary and appropriate in the
public interest and for the protection of investors and the assessment of
systemic risk
All reporting to the SEC in accordance with the Registration Act will be expressly exempt
from public disclosure pursuant to the Freedom of Information Act although the SEC
will be authorized to share the information with the Council and other government
agencies All agencies receiving the information will also be required to keep all
information confidential
The Registration Act becomes effective one year following the date of enactment
although Investment advisers to private funds may voluntarily register with the SEC
during this one year period During the next twelve months the SEC will be active
promulgating numerous rules and providing clarification
8142019 Guide to SEC Registration of Hedge Funds
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 7
Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Implications for Investment Advisers to Private Funds
The Registration Act requires advisers to quickly become familiar with the Advisers ActImportant considerations include but are not limited to
bull Compliance - new registrants would be required to adhere to the Advisers
Act Rule 206(4)-7 known as the Compliance Rule which requires
establishing written Policies and Procedures and appointing a competent
Chief Compliance Officer (CCO) Key to establishing an adequate
compliance program is evaluating and properly documenting existing and
potential conflicts of interest The SEC wants assurance that advisers have
a mechanism in place to identify risks conflicts of interest and have
established a system of internal controls to mitigate those risks
bull Disclosure - Registrants are subject to the Advisers Act disclosure rules
requiring the preparation and filing of Form ADV Part I and Part II See the
Form ADV section for a detailed review of Form ADV
bull Books and Records - In addition to following the books and records
requirements applicable to all registered advisers the books and records
of private fund advised by investment advisers to private funds are now
deemed to be books and records of the Adviser The SEC will now have
the authority to examine these books and records
bull Performance Fees ndash Registrants must follow Rule 205-3(d)(1) of the
Advisers Act which limits the ability to charge performance feesPerformance based compensation can be paid if the advisers clients are
qualified clients If you manage a 3c(1) fund and charge a performance
fee you will need to determine if your clients meet the ldquoqualified clientrdquo
threshold
bull Investment Advisory Contracts ndash With respect to the anti-fraud provisions
of the Advisers Act the SEC cannot define the term ldquoclientrdquo to include an
investor in a private fund managed by an investment adviser provided
that the adviser has entered into an advisory contract with such private
fund Many private funds may not have investment advisory agreements
separate and apart from the limited partnership or limited liability
company agreements We suggest that private fund managers review
these arrangements and enter into investment advisory agreements as
necessary and appropriate
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 7
Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 8
The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 9
Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 10
careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
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Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
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As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
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Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
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8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
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Compliance Rule - Advisers Act Rule 206(4)-7
Effective October 5 2004 SEC Rule 206(4)-7 (ldquothe Compliance Rulerdquo) became effective
for all SEC-registered advisers The rule reads as follows
If you are an investment adviser registered or required to be registered
under section 203 of the Investment Advisers Act of 1940 it shall be
unlawful within the meaning of section 206 of the Act for you to provide
investment advice to clients unless you
(a) Policies and procedures Adopt and implement written policies and
procedures reasonably designed to prevent violation by you and your
supervised persons of the Act and the rules that the Commission has
adopted under the Act
(b) Annual review Review no less frequently than annually the adequacy
of the policies and procedures established pursuant to this section and the
effectiveness of their implementation and
(c) Chief compliance officer Designate an individual (who is a supervised
person) responsible for administering the policies and procedures that you
adopt under paragraph (a) of this section
Under the Compliance Rule it is unlawful for an investment adviser registered with the
Commission to provide investment advice unless the adviser has adopted and
implemented written policies and procedures reasonably designed to prevent violation
of the Advisers Act by the adviser or any of its supervised persons The rule requires
advisers to consider their fiduciary and regulatory obligations under the Advisers Act
and to formalize policies and procedures to address them
Rule 206(4)-7 does not specifically list the elements that advisers must include in their
policies and procedures The SEC acknowledges that advisers are too varied in their
operations for the rules to impose of a single set of universally applicable required
elements Each adviser should therefore adopt policies and procedures that take into
consideration the nature of their specific operations Advisers must therefore havecustomized policies and procedures designed to prevent violations from occurring
detect violations that have occurred and correct promptly any violations that have
occurred
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The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
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Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
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SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 10
careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
8142019 Guide to SEC Registration of Hedge Funds
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FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
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FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
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Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 8
The SEC states the policies and procedures at a minimum should address the
following issues to the extent that they are relevant to that adviser
Policies and Procedures
bull Portfolio management processes including allocation of investment
opportunities among clients and consistency of portfolios with clients
investment objectives disclosures by the adviser and applicable regulatory
restrictions
bull Trading practices including procedures by which the adviser satisfies its
best execution obligation uses client brokerage to obtain research and
other services (soft dollar arrangements) and allocates aggregated trades
among clients
bull Proprietary trading of the adviser and personal trading activities of supervised persons
bull The accuracy of disclosures made to investors clients and regulators
including account statements and advertisements
bull Safeguarding of client assets from conversion or inappropriate use by
advisory personnel
bull The accurate creation of required records and their maintenance in a
manner that secures them from unauthorized alteration or use and protects
them from untimely destruction
bull The marketing of advisory services including the use of solicitors
bull Processes to value client holdings and assess fees based on those
valuations
bull Safeguards for the privacy protection of client records and information and
bull Business continuity plans
Rule 206(4)-7 requires each Adviser to review their policies and procedures annually to
determine their adequacy and the effectiveness of their implementation The reviewshould consider any compliance matters that arose during the previous year any
changes in the business activities of the adviser or its affiliates and any changes in the
Advisers Act or applicable regulations that might suggest a need to revise the policies or
procedures
Annual Review
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 9
Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1019
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 10
careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1119
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 11
FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1219
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 9
Although the rule requires annual reviews advisers should also be conducting interim
reviews by testing and assessing on an ongoing basis how significant compliance
events changes in business arrangements and regulatory developments affect the
advisers business
Rule 206(4)-7 requires each adviser registered with the SEC to designate CCO to
administer its compliance policies and procedures An Adviserrsquos CCO should be
competent and knowledgeable regarding the Advisers Act and should be empowered
with full responsibility and authority to develop and enforce appropriate policies and
procedures for the firm Thus the CCO should have a position of sufficient seniority and
authority within the organization to compel others to adhere to the compliance policies
and procedures
Chief Compliance Officer
What about Outsourcing the CCO Role
Some advisers inquire about outsourcing the CCO position The SEC does not explicitly
prohibit outsourced CCOrsquos However we believe that the SEC does not look favorably
upon hiring a third-party to serve as an adviser CCO The Compliance Rule requires the
CCO to be a ldquosupervised personrdquo which is defined as ldquohellipany partner officer director (or
other person occupying a similar status or performing similar functions) or employee of an investment adviser or another person who provides investment advice on behalf of
the investment adviser and is subject to the supervision and control of the investment
adviserrdquo The CCO is required to administer the firmrsquos written compliance procedures
We believe that advisers that attempt to outsource this role are generally perceived
negatively by the SEC and subject to increased scrutiny This does not mean that all
firms need to hire a dedicated CCO In many instances and in particular for certain
advisers to solely private funds an existing executive such as the CFO 2
2
The CFO is often a logical choice given hisher familiarity with internal controls and auditing
However other firm officers such as COO General Counsel and portfolio manager have also
successfully fulfilled the role
can effectively
function in both capacities However the ultimate decision should be made after a
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1019
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 10
careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1119
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 11
FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1219
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1019
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 10
careful assessment of an adviserrsquos business model infrastructure and available
resources In many cases a cost effective solution is to use the services of an outside
third party to assist with compliance rather than have a full-time dedicated compliance
person
Registration Process
1 Complete Entitlement Forms and submit to FINRA in order to gain access to the
IARD system which is required to begin the registration process This process
takes approximately 10 days
2 File Form ADV Part 1 electronically through IARD This process can take up to 45
days before approval is received by the SEC
3 Complete form ADV Part II and Schedule F in hard copy which should be
complete before beginning operations as a registered adviser
4 Prepare a customized Compliance Program including written policies and
procedures (compliance manual)
Form ADV - Disclosure Requirements
Form ADV is divided into 3 parts
Part 1A - Includes information about the adviser its business practicesthe ownership structure and the client base Part 1A is mandatory for
those advisers registering with the SEC andor state securities
authorities
Part 1B -Concerns state registration and is only required if an adviser is
registering with the state(s)
Part II - Known as an adviserrsquos brochure Part II along with its
accompanying schedules form the basis of the required adviser
disclosures to existing and potential clients In addition it is required to
be amended whenever material changes occur that affect an advisersbusiness Form ADV Part II is also required to be offered at least
annually to existing clients and documentation must be retained
demonstrating that such offer was made
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1119
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 11
FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1219
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1119
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 11
FORM ADV Part I
The Table below highlights the various sections of Part I and is offered to demonstrate
what information the SEC is seeking from advisers When changes occur to many of
these sections in ADV Part I amendments are required to be filed promptly Although
promptly is undefined it is generally interpreted to mean within 30 days of the
change
Part 1A - Item 1 Identifying Information
Part 1A - Item 2 SEC Registration
Part 1A - Item 3 Form of Organization
Part 1A - Item 4 Successions
Part 1A - Item 5 Information About Your Advisory Business
Part 1A - Item 6 Other Business Activities
Part 1A - Item 7 Financial Industry Affiliations
Part 1A - Item 8 Participation or Interest In Client Transactions
Part 1A - Item 9 Custody
Part 1A - Item 10 Control Persons
Part 1A - Item 11 Disclosure Information
Part 1A - Item 12 Small Businesses
Part 1B - Item 1 State Registration
Part 1B - Item 2 Additional Information
Schedule A Direct Owners and Executive Officers
Schedule B Indirect Owners
Schedule C Amendments to Schedule A and B
Schedule D Page 1 to 5 Additional Information to Certain Sections of Part 1
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1219
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1219
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 12
FORM ADV Part II - Brochure
On July 21st 2010 the SEC voted unanimously to adopt changes to Form ADV Part II
Commonly referred to as the investment adviserrsquos ldquobrochurerdquo this document is theprincipal disclosure document that registered investment advisers must provide their
clients and prospective clients The ldquobrochurerdquo provides to both existing investors and
potential investors in plain English narrative and investment adviserrsquos qualifications
investment strategies business practices conflicts of interest compensation and
disciplinary history
Proper disclosure is often an adviserrsquos best defense against enforcement action being
taken under the anti-fraud provisions of the Advisers Act Consequently properly
completing this document is critical to satisfying an adviserrsquos regulatory obligations The
main disclosure topics in the brochure which the SEC believes are most relevant to
investors include
Advisory business mdash An investment adviser must describe its advisory business
including the types of advisory services offered state whether it holds itself out as
specializing in a particular type of advisory service and disclose the amount of client
assets that it manages
Fees and compensation mdash An investment adviser must describe how it is
compensated for its advisory services provide a fee schedule and disclose whether
fees are negotiable The investment adviser must also describe the types of other
fees or expenses such as brokerage fees custody fees and fund expenses thatclients may pay in connection with the services provided
Performance-based fees and side-by-side management mdash An investment adviser
that accepts performance-based fees or that supervises an individual who accepts
such fees is required to disclose this fact If the investment adviser also manages
accounts that are not charged a performance fee the adviser must explain the
conflicts of interest that arise from the simultaneous management of these
accounts and must describe how it addresses those conflicts
Methods of analysis investment strategies and risk of loss mdash An investment adviser
must describe its methods of analysis and investment strategies and explain that
investing in securities involves risk of loss which clients should be prepared to bear
Investment advisers who use a particular method of analysis or strategy or who
recommend a particular type of security are required to explain the material risks
involved and discuss the risks in detail if those risks are unusual
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1319
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 13
Disciplinary information mdash An investment adviser is required to disclose in its
brochure material facts about any legal or disciplinary event that is material to a
clientrsquos evaluation of the advisory business or to the integrity of its management
personnel An investment adviser must deliver promptly to clients updated
information when there is new disclosure of a disciplinary event or a material
change to an existing disciplinary event
Code of ethics participation or interest in client transactions and personal trading
mdash An investment adviser is required to describe briefly its code of ethics and state
that a copy is available upon request The adviser must also disclose whether it or
an affiliate recommends to clients or buys or sells for client accounts securities in
which the adviser or an affiliate has a material financial interest and if so the
conflicts of interest associated with that practice The adviser also must disclose
whether it or an affiliate invests (or is allowed to invest) in the same securities that
it recommends to clients or in related securities such as options or other
derivatives and must explain the conflicts involved and how it addresses those
conflicts In addition an investment adviser that trades in the recommended
securities at or around the same time as the client has to explain the specific
conflicts inherent in that practice and how it addresses them
Brokerage practices mdash An investment adviser is required to describe the factors
considered in selecting or recommending broker-dealers for client transactions and
determining the reasonableness of brokersrsquo compensation Investment advisers also
must disclose soft dollar practices (research or other products or services other
than execution provided by brokers or a third party to the investment adviser in
connection with client transactions) client referrals (using client brokerage to
compensate brokers for client referrals) directed brokerage (asking or permitting
clients to send trades to a specific broker for execution) and trade aggregation
(bundling trades to obtain volume discounts on execution costs) Investment
advisers must explain how they address the various conflicts of interest associated
with these practices
It is paramount that registered investment advisers understand that any issues which a
client or potential client would deem material must be disclosed even if not explicitly
asked in ADV Part II
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1419
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 14
As with ADV Part I the newly adopted rules pertaining to ADV Part II will require the
ldquobrochurerdquo to be filed electronically on the SECrsquos website and will be publicly available
An adviser must deliver the brochure to a client before or at the time the adviser enters
into an advisory contract with the client Furthermore advisers must provide each
client an annual summary of material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated brochure
An adviser will be required to deliver ldquobrochure supplementsrdquo to new and prospective
clients providing them with information about the specific individuals who will provide
services to the clients The supplement will contain brief reacutesumeacute-like disclosure about
the educational background business experience other business activities and
disciplinary history of the individual so that the client can assess the personrsquos
background and qualifications It will also include contact information for the personrsquos
supervisor in case the client has a concern about the person
Establishing a Compliance Program
While the Compliance Rule appears relatively straight forward with regard to
establishing policies and procedures it is more involved than meets the eye The
Compliance Rule specifically lists 10 items which at a minimum need to be included
However it is misleading to expect the SEC to be satisfied if you only develop policies
and procedures covering these 10 areas The regulators certainly expect to see
additional items included For example a robust compliance manual would also contain
additional sections including but by no means limited to advisory contracts proxy
voting payment of fees supervision and SEC and State registration
When assisting clients through the registration process the bulk of our time is spent on
customizing the compliance manual The manual should be a dynamic document that
evolves with the business The SEC periodically throughout the year provides guidance
to firms with regard to expectations Inevitably some of these items represent areas of
current high interest to the SEC Consequently the compliance manual and program
should be dynamic and updated periodically as the rules best practices and your
business changes
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1519
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 15
Associated Costs
Cost to Comply
As private funds consider registration it is important to remember that implementing
an adequate compliance program is a must-have that will require time and expense to
establish There will also be on-going costs associated with maintaining and enforcing a
properly established compliance program Regardless of size and complexity there are
certain minimal requirements which must be present in all compliance programs
Moreover the actual compliance program must be customized to each adviserrsquos unique
business risks The actual costs are therefore very much directly associated with the
complexity of the business At a minimum each adviser will have to appoint a
competent CCO familiar with the various rules and regulations However the CCOshould also have the stature and authority within the organization to administer and
enforce the compliance program A tone of compliance from senior management is very
important to creating the necessary culture of compliance within an organization
Each registered investment adviser needs to assess their unique situation and business
model when determining how best to allocate resources to compliance While larger
advisers often have dedicated compliance and perhaps internal audit they need to
consider the adequacy and independence of their internal reviews being performed
in-house Smaller advisers need to assess the cost benefit trade-off of staffing a
compliance department with sufficient personnel to ensure suitable and timelymonitoring and testing versus outsourcing part of the testing and review of compliance
to an independent third party
Cost of non - Compliance Failure to establish an adequate compliance program has
resulted in enforcement actions being brought against CCOs and Adviserrsquos The actual
costs associated with non-compliance may include significant fines and censures as well
as employees being barred from working in the industry In addition to fines the
reputational damage can be staggering Consequently CCOs need to ensure they are
working for a firm which has the proper compliance culture CCOs should be prepared
to walk away from a position if they are not completely satisfied with their employers
commitment to establishing an effective compliance program
A recent enforcement case involved a CCO being held liable for aiding and abetting his
employers failure to establish maintain and enforce policies and procedures designed
to prevent violations of the regulations In this particular case the CCO was not involved
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1619
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1719
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 17
Some of our traditional compliance related services which are useful to all registered
investment advisers include but are not limited to
Quarterly Compliance Reviews
Most advisers prefer to distribute the strain on their operations over the course of the
year Quarterly Compliance Reviews spread all the aspects of the annual review over the
course of the year in manageable phases while revisiting critical and changing areas
throughout the year The dynamic scope and disciplined approach of Quarterly
Compliance Reviews stimulates the evolution of the compliance program keeping it
continually current and addressing any issues as they emerge Quarterly Compliance
Reviews optimize compliance resources and limit the disruption to your firm Like the
Annual Compliance Review each Quarterly Compliance Review concludes with a
customized easy to read report and action plan
Additionally Quarterly Compliance Reviews address the essential on-going demands of
a compliance program such as managing disclosure documents filing requirements
and compliance policies and procedures Quarterly Compliance Reviews provide the
opportunity for SEC3s professionals to establish a strong working relationship with each
adviser and fund and actively participate in the compliance program
Mock SEC Examinations
Much of the fear surrounding a regulatory examination stems from the unknown
element A Mock SEC Examination is an effective process to gauge the types of
exposures and concerns that an adviser or fund would face during a real regulatory
examination Our Mock SEC Examinations bring the same SEC focus utilizing proven
exam approaches and methodologies including interviews reviews of policy and
procedures analysis testing and conclude with a customizable summary of
assessments recommendations and proposed solutions SEC3s professionals many
with years of experience as senior examiners with the SEC or as compliance
professionals provide expert insight and guidance Mock SEC Examinations pierce the
mystique of a regulatory examination and transform an often stressful experience into avaluable assessment process that allows a Chief Compliance Officer and the compliance
staff to face a future regulatory examination with confidence and peace of mind
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1819
SEC Compliance Consultants Inc Bridging your Compliance Gap
Telephone 6104159261 Facsimile 6102001463 wwwseccccom 18
Annual Compliance Review
For registered advisers the Compliance Rule requires each adviser to review its policies
and procedures at least annually to determine their adequacy and the effectiveness of
their implementation If advisers are not performing any reviews during the year the
annual review is necessary During an annual compliance review SEC3 provides
independence and assists Chief Compliance Officers in every phase of the annual review
process from formulating a strategic plan to conducting thorough assessments and
testing of all aspects of the compliance program to planning for next years review
SEC3s Annual Compliance Review allows advisers to maximize available resources by
fulfilling specific elements or the entire scope of the regulatory obligation The Annual
Compliance Review concludes with a customizable easy to read report and action plan
Risk Assessment amp Gap Analysis
The Risk Assessment amp Gap Analysis not only fulfills regulatory expectations it provides
valuable insights into your risk profile and your exposure to those risks SEC3s Risk
Assessment amp Gap Analysis is based on our experience as ex SEC examiners Our system
considers the likelihood and impact of the compliance risks specific to each advisory
firm or fund and assesses how well the existing controls mitigate those risks The Risk
Assessment amp Gap Analysis report is a concise but detailed summary in plain English
that prioritizes risks by exposure arming the Chief Compliance Officer and seniormanagement with the critical information to immediately implement an action plan
Compliance Testing amp Analysis
Forensic tests are the eyes and ears of the Chief Compliance Officer Rigorous
consistent forensic testing provides a Chief Compliance Officer with an early warning
system Various forensic tests are means to identify symptoms of potential compliance
problems and can serve as confirmation that the compliance program is functioning
properly SEC3 can assist Chief Compliance Officers in designing and conducting a
battery of rigorous and periodic forensic compliance tests as part of the continuous
monitoring of the compliance program including but not limited to trading and
execution portfolio compliance code of ethics account administration and investment
performance
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom
8142019 Guide to SEC Registration of Hedge Funds
httpslidepdfcomreaderfullguide-to-sec-registration-of-hedge-funds 1919
SEC Compliance Consultants Inc Bridging your Compliance Gap
Compliance Training
Drafting and adopting reasonable policies and procedures is only part of the successful
implementation of a compliance program effective compliance training is also essential
The success of a compliance program is predominately determined by the ability of the
advisers or funds staff to consistently fulfill the goals and functions of the policies and
procedures SEC3s professionals will assist Chief Compliance Officers in developing and
conducting customized training programs to your staff and boards on the various
aspects of your compliance program and their responsibilities under that program Our
belief is that training should rejuvenate the staffs awareness and sensitivity of
compliance policies while reinforcing the importance of each persons role in the
compliance program
Contact Information
For additional information please contact Janaya Moscony CFA President amp Founder
of SEC Compliance Consultants Inc by telephone at 6104159261 x1 or email us at
janayaseccccom