Compliance Avenue

HedgeOp Compliance, LLC will be holding a free webinar on March 24th on: “Conducting an Annual Compliance Review.”

This seminar will look at HedgeOp’s suggested method for conducting an annual review including: review of compliance inventory items, conflicts of interest of review, use of employee and service provider questionnaires and more.  Please note that this seminar is not only geared towards SEC-registered managers, but also unregistered managers looking to conduct an annual compliance review as a form of “best practice.”

You can view more information and register for the event here.

For all of the SEC registered investment advisers out there, don’t forget that your annual ADV Part 1 update filing is due at the end of march (90 days after fiscal year end).  Update filings are made via the IARD system and AUM-based filing fees will be required this year.

While you’re thinking about Form ADV’s, don’t forget that some states require that you submit a copy of your ADV Part II to them (if you have made a notice filing in that state).  For example, New York State requires that advisers who have made notice filings to the state must submit a copy of their ADV Part II to the NYS Dept. of Law.  An updated copy of Part II must also be offered to your investors and advisory clients once a year.

Touching on a subject that we discussed back in August, FINRA has issued an advisory note stating that brokers must monitor their employees’ activity on social networking sites.  According to the Bloomberg article:

Firms that archive client communications including e-mails need to adopt similar policies for social networking sites and may use software to automatically log brokers’ Web messages…

With the proliferation of social networking sites and the privacy restrictions that most users utilize, it is difficult to imagine how brokers can possibly hope to monitor or record their employees activities on those sites.  The best they can hope for is to issue policies prohibiting the use of social networking sites for business.  As discussed in our earlier article on the subject, this is eventually going to become an issue for hedge funds and RIA’s as well.  Will the SEC eventually issue similar guidance?

Seven more people were indicted yesterday in the insider trading case involving the Galleon Group and numerous other hedge fund traders, lawyers and corporate executives. The seven all-stars are:

• Zvi Goffer – previously worked at Galleon and then founder of  his own hedge fund, Incremental Capital;
• Arthur Cutillo – a former lawyer at Ropes & Gray LLP;
• Jason Goldfarb – an associate at a New York law firm;
• Craig Drimal – a trader who worked in Galleon’s office space but wasn’t employed by the firm,
• Zvi’s Goffer’s brother Emanuel Goffer – worked at Incremental Capital;
• Michael Kimelman -  worked at Incremental Capital; and
• David Plate – worked at Incremental Capital.

Hedge Fund Net is reporting that the defendants (which also includes Raj Rajaratnam and Danielle Chiesi) collectively made at least $11 million for themselves and their firms off their trading on insider tips. The seven can add being charged with securities fraud and conspiracy to their resumes. If convicted, they can each get 20 years in prison for each count of securities fraud and up to 5 years in prison for each count of conspiracy. Until the outcome of their trials, the New York Times has reported that each of the above all-stars are free on bail and will enter pleas at their arraignments on February 2.

Hedge Funds Review is reporting that the hedge fund industry posted its strongest gains since 1999.  However, a large portion of managers are unable to collect their performance fees and are relying on their management fees to pay their staff, as reported by the The Wall Street Journal.  It is reported that although the average hedge fund performance in 2009 was 20%, most hedge funds were still not able to collect their performance fees at the end of 2009.  Hedge Fund Research Inc. estimated that only about 31% of hedge funds were able to collect performance fees at the end of the fourth quarter. A majority of hedge fund managers were not able to surpass their high water marks at the end of 2009.

The Securities and Exchange Commission is shaking up its enforcement division, establishing five priority areas, including one pointed directly at hedge funds and private equity firms.

Read more here

The SEC has announced that Carlo V. di Florio has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE). Di Florio was previously a partner in the Financial Services Regulatory Practice at PricewaterhouseCoopers where he “played a leading role in strengthening the corporate governance, risk management and regulatory compliance practice.”

He has also played a “leading role in numerous high-profile engagements where PricewaterhouseCoopers was retained to investigate corporate fraud, corruption, conflicts of interest and money laundering.”

Read More Here.

On December 16th, the SEC announced in a press release that they have approved certain amendments to the Advisers Act custody rule (Rule 206(4)-2). Amendments to this rule were originally proposed in May 2009. The final rule was released on December 20, 2009 and incorporates many of the amendments proposed in May, but also contains several modifications to the May 2009 proposal particularly with respect to the impact on advisers to pooled investment vehicles.

The Release actually makes a number of specific suggestions for additional compliance procedures that should be considered.

A few highlights of the final rule amendments include:

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A Connecticut hedge fund manager has pleaded guilty to lying to investors about the size of his funds and their performance.

More here:

Hedge Fund Manager Pleads Guilty In Conn.

George Canellos, the new New York SEC Regional director has not been shy in advising the investment adviser community about the changes that are being made on the examination front.  There is little doubt that the Bernard Madoff $65 billion Ponzi scam, and more recently, an alleged $20 million insider trading scheme at hedge fund firm Galleon Group, among others, has made regulators turn their attention even closer to the alternative investment industry.   It is  hard not presuppose that that SEC is trying to build back its credibility.

First, budgets have increased.  We have learned that the SEC is dedicating more resources to ensure that its examination staff is properly trained so that they can better understand the products that are now being offered to investors and improve their ability to assess financial and compliance risks.   We can also expect to see staff members, including commissioners developing areas of specialization .   Additionally, the SEC has been given more tools to better conduct and streamline  investigations but putting technology, among other things, to work to go through tips and complaints in a more efficient manner.

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