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With new regulatory deadline in 2012 hedge funds should focus now on internal culture of compliance

Wednesday, June 29, 2011

Jonathan Saxton
Opalesque Industry Update – Hedge fund legal and regulatory support providers are expressing their approval of the SEC deadline extension given to hedge fund managers required to register with the regulatory agency.

“We believe that the SEC’s decision to delay the registration deadline was due to the fact that the previous timeline was too tight for all involved,” said Jonathan Saxton, Director of Global Risk and Regulation at Kinetic Partners in a statement issued by the firm. “Now the funds have been given enough more time, they must make sure they use it to properly prepare and develop appropriate systems and controls as well as a strong internal culture of compliance. The extra time helps the industry but also means that they will have less of an excuse for not being fully prepared.”

The last part of that statement echoes the worries that many legal and regulatory service providers had over the past six to nine months, as they saw only a fraction of hedge funds moving towards registration ahead of the initial July 2011 deadline. While most of that was due to the SEC’s slow reveal of final rules for the regulation, it was only last week that the agency officially extended the deadline. Prior to that the entire industry was speculating on the odds that the SEC would push back the deadline.

Advisors now have until March 30, 2012 to comply with the new registration regulations.

Some of the key highlights of the final rules and regulations that Kinetics Partners points out to its clients are:

  • Advisers to hedge funds and other private funds managing $150m or more of assets must submit the ADV application by mid-February 2012 and register with SEC by the March 30, 2012 deadline.

  • Advisers managing from $25m to $100m in assets, so called mid-size advisors, will be shifted to state regulation unless their state does not examine advisers, such as New York, Minnesota and Wyoming. In those states the adviser would remain registered with the SEC. Advisers required to shift to state regulation would have until June 28, 2012 to complete their transition.

Changes to Form ADV and information to be disclosed includes:

  • Basic organizational and operational information about each fund they manage, such as the type of private fund that it is (e.g., hedge fund, private equity fund, or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser’s services to the fund.

  • Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).

  • More information about conflicting or potential conflicting relationships.

  • A uniform calculation for “assets under management.”

  • A new definition of venture capital advisers applies to funds that invest mostly in private companies, with minimal leverage, no redemption rights for investors and no more than 20% of its capital in non-qualifying investments.

  • Family offices are exempt if the office advises only family clients and is controlled exclusively by family members, not presenting themselves publicly as investment advisers.

  • Private fund advisers with U.S. assets under management of less than $150 million will be defined as Exempt Reporting Advisers (“ERA”) under Section 203 of the Advisers Act and will be required to report specific information to the SEC on an annual basis via the IARD system. ERAs will be subject to examination by the SEC but will not be part of the routine examination program and will be required to file portions of Part 1 of Form ADV.

  • The Foreign Private Adviser exemption was adopted.


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