By now, you are probably aware that advisors to private funds (a/k/a hedge funds or pooled investments) need to register as investment advisors if they provide advice on securities to private funds. (To learn more, please read the SEC’s rule release.) The SEC is requiring these advisors to become registered by February 1, 2006. While we recommend submitting your filing with the SEC as soon as possible (preferably before December 1, 2005), an applicant needs to have all its ducks in a row before filing.
The rumor on the street is that the SEC is seeking opportunities to audit newly registered advisors to private funds. In fact, we have heard of at least one firm being audited within weeks of SEC approval. The key to surviving an SEC audit is to understand the Investment Advisers Act of 1940 and then prepare in detail your documents and procedures in accordance with these requirements.
In order to register, the SEC merely requires the submission of the Form ADV Part I, which is probably the simplest form to complete and file. Nonetheless, when the SEC conducts an examination, it will be focused upon ensuring that the advisor firm has properly completed the Form ADV Part II with sufficient details regarding advisory services, fees, conflicts of interests, and outside business activities. The SEC will also conduct a thorough review of the firm’s supervisory and procedures manual, client agreements, and required books and records.
As an advisor to a hedge fund, you may be anxious about the SEC’s looming registration deadline; however we strongly recommend that you refrain from submitting the ADV Part I at this relatively early juncture (in late August) if your firm hasn’t completed the entire ADV, established a written compliance program, and started to follow the SEC books and records requirements.
Posted by Bryan Hill
Labels: Hedge Funds, How to Become RIA, Investment Advisor Registration, Registration