Preparing for a Hedge Fund SEC Examination<br />December 23, 2010<br />*Note, the information provided in this article is ...
Types of Information Requested<br />The types of information requested by the SEC during a routine examination include:<br...
General Information<br />Org. chart showing ownership percentages and control persons.<br />Names of firm’s directors who ...
Compliance Program, Risk Management & Internal Controls<br />Compliance policies & procedures in effect during examination...
Compliance Program, Risk Management & Internal Controls, Continued<br />Information about oversight process the firm uses ...
Compliance Program, Risk Management & Internal Controls, Continued<br />Names of fair-valued and illiquid securities held ...
Investment Activities<br />A trade blotter that lists transactions in securities and other financial instruments for curre...
Portfolio Management<br />Names of securities held in client portfolios as of a given date<br />Include: aggregate market ...
Portfolio Management, Continued<br />Names of the companies for which the hedge fund’s employees serve on creditors’ commi...
Brokerage Arrangements<br />List of approved broker-dealers.<br />Minutes and other documentation from brokerage review co...
Conflicts of Interest and/or Insider Trading<br />The firm’s Code of Ethics and insider trading policies.<br />Reports of ...
Performance Advertising & Marketing<br />Pitch books,  presentations, pamphlets, brochures and any other marketing materia...
Performance Advertising & Marketing, Continued<br />All accounts not included in a composite.<br />All terminated composit...
Financial Records<br />Balance sheet, trial balance, income statement, and cash flow statements as of the most recent fisc...
Eze Castle Integration Overview<br />
Tel: 800.752.1382	   www.eci.com<br />
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Preparing for Hedge Fund SEC Examinations

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This presentation looks at what to expect during an examination, as well as the types of information that are typically requested by the SEC.

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Preparing for Hedge Fund SEC Examinations

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