Start Taking Preparatory Steps Now for Registration

While many of the numerous bills requiring the registration of hedge funds have stalled, some continue to move through Congress

One of the most recent was promoted by Senator Christopher Dodd (D-Conn.), and requires, among other things, that advisors having in excess of $100 million under management be required to register, while exempting advisors for both venture capital and private equity monies from registration.¹

Though some of the other bills have lesser or greater thresholds, but contain no exemption for venture capital or private equity, it seems fairly clear that some form of registration will come to pass and there are some basic steps hedge funds can be taking to be prepared.

The key question that should be going through the minds of non-registered advisors is how registration will change what you do and how you can restructure your organization to conform to the new policies and procedures.

Every registered investment adviser is required to establish and maintain policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 as well as to detect and correct violations that occur. These compliance policies and procedures should address the practices and risks that exist for at each adviser. There is no “cookie-cutter” approach to adherence and no standard set of policies and procedures that address the requirements for all advisers. Simply put, each adviser is different.

However, based on Securities and Exchange Commission releases, the expectation is that your policies and procedures should address certain issues, including:

• Portfolio management processes when it comes to allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, disclosures to clients, and applicable regulatory restrictions
• Accuracy of disclosures made to investors, clients and regulators, including account statements and advertisements
• Proprietary trading by you as well as the personal trading activities of your supervised persons
• Safeguarding of client assets from conversion or inappropriate use by your personnel
• Accurate creation of required records and maintenance of those records in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction
• Installation of safeguards for the privacy protection of client records and information
• Implementation of trading practices, including procedures that satisfy your best execution obligation, use client brokerage to obtain research and other services (referred to as “soft dollar arrangements”), and allocate aggregated trades among clients
• Marketing advisory services, including the use of solicitors
• Processes to value client holdings and assess fees based on those valuations
• Enactment of business continuityplans

Advisers should also retain a chief compliance officer, if they have not already. Your CCO should be knowledgeable regarding the Advisers Act, review compliance programs annually and have the authority to enforce compliance actions within the firm’s stated policies and procedures.

There are various firms that have the capability to assist you in establishing a compliance program and some of organizations have the capability to test compliance programs prior to the SEC performing its own examination — McGladrey is one of those organizations, so please feel free to contact your account partner or myself with questions or concerns.

Martin Lax is a managing director in the New York office of McGladrey He can be reached at 212.372.1208, or via e-mail, at martin.lax @mcgladrey.com.