Earlier this month Norm Champ, Deputy Director, Office of Compliance Inspections and Examinations at the SEC, addressed the New York City Bar and gave a preview of what the SEC has in mind for private fund advisers. I thought this tied nicely with the speech given by Norm’s boss, Carlo V. di Florio, at PEI’s Private Fund Compliance Forum.
First, some statistics:
- As of early April, there were approximately 4,000 investment advisers that manage one or more private funds registered with the Commission
- 34% (more than 1,350) registered since the effective date of the Dodd-Frank Act.
- This represents a 52% increase in registered private fund advisers
- 32% of all advisers currently registered with the Commission report that they advise at least one private fund.
- Of the registered private fund advisers, approximately 7% (284) are domiciled in a foreign country; most of these (136) are in the United Kingdom.
- Registered private fund advisers report on Form ADV that they advise approximately 30,000 private funds with total assets of $8 trillion, which is 16% of total assets managed by all registered advisers.
- Based on available information, 48 of the 50 largest hedge fund advisers in the world are now registered with the Commission.
- Fourteen of these largest hedge fund advisers are new registrants.
It sounds like fund advisers should expect a visit from the SEC this fall.
“Our strategy for these new registrants will include (i) an initial phase of industry outreach and education like today (sharing our expectations and perceptions of the highest risk areas), (ii) followed by a coordinated series of examinations of a significant percentage of the new registrants that will focus on the highest risk areas of their business and help us to risk rate the new registrants, and (iii) culminating in the publication of a series of “after action” reports, reporting to the industry on the broad issues, risks, and themes identified during the course of the examinations.”
This is exactly what Mr. DiFlorio described as the upcoming SEC strategy. Given the current staffing, it would seem that the SEC visit would need to be brief in order to reach a substantial portion of the 1,350 new registrants in a short period of time.
Champ ends with Ten Suggested Takeaways for Registered Advisers to Hedge Funds
- Review your control and compliance policies and procedures annually.
- Assess and prepare for Form PF requirements.
- Identify risks.
- Enhance your expertise.
- Verify client assets.
- Get rid of any silos, identify conflicts.
- Provide clear, complete, and accurate disclosure in performance and advertising.
- Verify portfolio management compliance.
- Address your complaints.
- Check your IT security.
We know the SEC is coming and what they are looking for. It’s time for newly installed CCOs to put the work in to make the SEC happy when they appear on your doorstep.