If you read our post on the hedge fund registration bills that are currently in congress, you may start to get the feeling that hedge fund registration is all but inevitable.   The question that a lot of hedge fund managers are now facing is: when should I pull the trigger on registration?  Do I wait until legislation is passed or do I get ahead of the curve and register now?

Each answer to those questions has its pros and cons, but if we look back in time to the pre-Goldstein era, we may be able to narrow down the response that is most beneficial to managers operating today.

To recap –  in 2004, the SEC created a rule which required the registration of most hedge fund managers by February 1, 2006.   Back then, just like today, there were some managers who registered immediately and others who waited until the very last minute.   As a compliance service provider, we helped dozens and dozens of managers with their SEC registrations during this time and as the deadline neared, we were literally operating at capacity.  The same held true for other industry service providers that we know.   This alone is one very large argument for starting to think about registration early.  In fact, we have already seen a large uptick in unregistered managers starting to initiate the registration process.

Another important factor to think about is, however unlikely, the possibility that you can be audited immediately after your registration becomes active.  The worst thing that can happen to a manager is that they filed their registration at the last minute without actually building out the appropriate compliance program.  If they get caught unaware and unprepared, it could spell big trouble.

For our clients that are getting registered, we always recommend that they “live” under their new compliance infrastructure for some time before actually pulling the trigger on the registration (ideally 1-2 quarters).  In other words, get the registration all teed up and then live with a “safety net” for a few months to ensure that all of your employees understand their new requirements and obligations as an employee of an RIA.   This will give you some level of comfort that if you do get audited immediately, you will have nothing to worry about.

The bottom line is that there is no downside to starting early.   You don’t necessarily need to file your ADV until you are required to do so, but why not start to think about the process, start building your compliance infrastructure and start educating your employees so that you don’t experience “compliance shock” when legislation is actually passed?