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Hedge Fund SEC Examination Preparation Guide


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During our recent webinar on hedge fund due diligence, we received a number of questions regarding the SEC’s process for conducting routine examinations. To help simplify this process, we have …

During our recent webinar on hedge fund due diligence, we received a number of questions regarding the SEC’s process for conducting routine examinations. To help simplify this process, we have provided two articles on what to expect during an examination, as well as the types of information that are typically requested by the SEC.

To further assist with this complex process, we have created a presentation on the topic. Check out Hedge Fund SEC Examination Preparation Guide now!

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  • 1. Preparing for a Hedge Fund SEC Examination
    December 23, 2010
    *Note, the information provided in this article is based on SEC documentation, including SEC Form 2389 and SEC Form 1661, and does not constitute Eze Castle Integration legal or investment advice.
  • 2. Types of Information Requested
    The types of information requested by the SEC during a routine examination include:
    General information about the firm
    Details on compliance risks & policies
    Documentation of compliance testing
    Information on actions taken as a result of compliance testing
    The following is a more detailed outline of the types of information requested by the SEC during a routine examination.
  • 3. General Information
    Org. chart showing ownership percentages and control persons.
    Names of firm’s directors who resigned during the examination period.
    Names of employees who were disciplined or terminated during the examination period.
    Current standard client advisory contracts or agreements.
    Current fee structure.
    Names and locations of service providers, services performed and information about the due diligence process to select and monitor providers.
  • 4. Compliance Program, Risk Management & Internal Controls
    Compliance policies & procedures in effect during examination period.
    Information on the fund’s compliance testing
    Include: compliance reviews, quality control analyses, surveillance and transactional tests performed by the firm.
    Inventory of firm’s compliance risks.
    Written guidance that has been provided to employees regarding the compliance risk assessment process.
  • 5. Compliance Program, Risk Management & Internal Controls, Continued
    Information about oversight process the firm uses for any remote offices.
    Any client complaints.
    Names of pricing services, quotation services and externally-acquired portfolio accounting systems used in the valuation process.
  • 6. Compliance Program, Risk Management & Internal Controls, Continued
    Names of fair-valued and illiquid securities held by clients, a description of any fair value process employed and all fair value reports prepared or reviewed by a valuation committee.
    Supporting documentation for the most recent advisory fee calculation.
    Firm’s business continuity plan (BCP) and documentation regarding the results of the firm’s most recent test of its business continuity plan. *Note, Eze Castle Integration can help you create a BCP.
  • 7. Investment Activities
    A trade blotter that lists transactions in securities and other financial instruments for current and former clients.
    Details on proprietary and/or trading accounts should also be included.
  • 8. Portfolio Management
    Names of securities held in client portfolios as of a given date
    Include: aggregate market value, aggregate number of shares or principal and/or notional amount held, name of each client holding an interest, and amount owned by each client for each position.
    Minutes from any investment or portfolio management committee meetings.
    Names of public companies for which the hedge fund’s employees serve as officers or directors.
    Include each employee’s name.
  • 9. Portfolio Management, Continued
    Names of the companies for which the hedge fund’s employees serve on creditors’ committees.
    Again, be sure to include the names of those employees.
    The firm’s ten most profitable and ten least profitable investment decisions, based on total return.
    Include: purchase date, sale date, and amount of gain or loss
    A copy of the firm’s policy on proxy voting.
  • 10. Brokerage Arrangements
    List of approved broker-dealers.
    Minutes and other documentation from brokerage review committee meetings.
    List of all soft-dollar arrangements the firm was involved with during the inspection period.
    List of commission-sharing arrangements
    Include: name of the broker-dealer and the total amount allocated to each arrangement.
    Securities in which the fund was a market maker.
    Securities for which the fund acted as an underwriter.
    Procedures for addressing trade errors.
  • 11. Conflicts of Interest and/or Insider Trading
    The firm’s Code of Ethics and insider trading policies.
    Reports of securities transactions by access persons.
    Any fee-splitting or revenue-sharing arrangements.
  • 12. Performance Advertising & Marketing
    Pitch books, presentations, pamphlets, brochures and any other marketing materials given to existing or prospective clients.
    Advertisements used to inform or solicit clients, including any information that is available to prospects online.
    If the website contains sections that are only accessible with a username and password, create temporary login information for the SEC to use during examination.
    All performance composites and the accounts included in each.
  • 13. Performance Advertising & Marketing, Continued
    All accounts not included in a composite.
    All terminated composites.
    Parties that were compensated for soliciting clients on the firm’s behalf
    Include: all agreements, correspondence, and separate disclosure documents associated with third party solicitors.
    All completed RFPs.
    Documentation that proves the fund is in compliance with the Global Investment Performance Standards (GIPS), if applicable.
  • 14. Financial Records
    Balance sheet, trial balance, income statement, and cash flow statements as of the most recent fiscal year end.
    Cash receipts and disbursements journal.
    General ledger and chart of accounts.
    Any loans or sales of the firm’s stock to clients.
  • 15. Eze Castle Integration Overview
  • 16. Tel: 800.752.1382