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News May 23, 2005 Issue

SEC Examiners Conducting Hedge Fund Survey

Remember how Commissioners Cynthia Glassman and Paul Atkins, in their dissent to the SECís hedge fund adviser rule, said that the SEC should have obtained and studied data from the existing universe of registered hedge fund managers before requiring all hedge fund managers to register?

It looks like the SEC is moving ahead on that idea.

An OCIE inspection list sent to a hedge fund manager earlier this month by the SECís North East Regional Office featured a new "Demographic Information Matrix." The list requested that the matrix be filled out and sent back to the examiners in electronic format.

For each private investment fund managed by the adviser or its affiliates, the staff wanted to know the following information:

  • Name of the fund and, if applicable, the fundís SEC registration number (even though the matrix seemed intended to apply to unregistered funds only).
  • Basis for exemption from registration under the Investment Company Act (Section 3(c)(1), 3(c)(7), etc.) and the Securities Act (Section 4(2), Reg. D, etc.).
  • Ticker symbol (if any).
  • Structure (LP, LLC, corporation, trust, other).
  • Form of organization and location of the "governing authority" (GP, managing member, board of directors, etc.), and relationship to the fundís adviser (is the governing authority the same as the fundís adviser?).
  • Organization of the fund (U.S. fund or offshore fund and if so, where).
  • Name and 801- number of each registered adviser and sub-adviser to the fund.
  • The fundís advisory fee, including base rate and performance fee rate.
  • Name and location of the fundís third party administrator, custodian, and independent auditor (if applicable).
  • Name of the fundís prime broker(s).
  • The fundís primary investment strategy or style (long-short equity, equity market neutral, fixed income arbitrage, convertible arbitrage, dedicated short seller, emerging markets, event driven, hedged equity, global macro, managed futures, multi-strategy, or fund-of-funds).
  • Type of fund (single fund, master, feeder, fund of funds).
  • Number of investors.
  • Characteristics of the fundís investor base (how many investors are individuals, family offices, institutions, funds of funds, other?).
  • Total assets in the fund.
  • Percentage of assets invested in illiquid securities or private placements.
  • Number of affiliated/insider investors.
  • Percentage of the fundís equity that is owned by affiliated or insider investors.
  • Number of investors that own certain percentages of the fundís equity (how many own between 10 and 20 percent of the fund, between 21 and 30 percent of the fund, greater than 30 percent?).
  • Date that interests in the fund were first offered to non-affiliated investors.
  • Fundís operating status (accepting new investors, accepting additional investments from existing owners, closed, liquidating, or terminated).
  • Information on lockups for new investorís initial purchase and investorís subsequent purchases (two years or less, or greater than two years).
  • Frequency that redemptions are offered (monthly, quarterly, semi-annually, annually, longer than annually, upon request).
  • The limit on amount that a single owner is allowed to withdraw at each redemption period, and the amount that owners in the aggregate are allowed to withdraw at each redemption period.
  • Whether or not redemption rights of owners were suspended during the inspection period.

The exam list also contained several questions that seemed to be new, such as a request for procedures that govern investments in exchange traded funds and other registered investment companies, and/or used to ensure compliance with ICA Section 12(d)(1) (which limits the amount of investment company shares that may be purchased by another investment company).

The list requested that the hedge fundís custodian send independent confirmations of all positions directly to the SEC. Similarly, the list asked that any administrator that maintains records of the fundís investorsí accounts send information about the total number of shares outstanding, number of limited partners, and the value of each limited partnerís interest in the fund, directly to the SEC.

The list also asked for information on any direct or indirect compensation received by the adviser paid by any of the fundís service providers. It asked whether the adviserís affiliates perform services, such as NAV calculation, not covered by the adviserís compliance program and oversight by the adviserís CCO.

Also of note: the list asked for a summary of all proposed business transactions, side deals, and other arrangements that the adviser was asked to consider but rejected because the firm felt it was "inadvisable, inappropriate, unethical, or possibly illegal." For each rejected scheme, the adviser was asked to describe it, explain why it was rejected, and additionally provide "the name and contact information of all involved firms and persons," as well as "copies of any pertinent documents including letters or electronic communications."