HEDGE FUND INSPECTIONS

The anti-fraud provisions of the Investment Advisers Act of 1940 ("Advisers Act") are pertinent to all investment managers. Whether registered with the SEC, a state, or not registered with any regulatory authority, the anti-fraud provisions of the Advisers Act subject all investment advisers to potential liability. As such, hedge fund managers must be concerned with liability from the SEC as well as from investors.

Due to significant public scrutiny following several monumental accounting scandals, the SEC appears to be increasing its oversight of all companies in the investment management industry, including hedge funds. This fact is evidenced by three recent SEC enforcement actions against hedge fund managers. The first two cases focuses on improper trading schemes and the last case involves a fund overstating the value of the partnership’s assets.

The links to these cases are detailed below:

Enforcement Action Number One:
http://www.sec.gov/litigation/admin/34-48188.htm

Enforcement Action Number Two:
http://www.sec.gov/litigation/admin/ia-2108.htm

Enforcement Action Number Three
http://www.sec.gov/litigation/litreleases/lr17841.htm

ACA provides hedge fund managers with peace of mind by conducting inspections focusing on high risk areas that could subject the adviser to liability. Specifically, our inspections include a detailed review of the following high risk areas:

  • Adherence to the investment objectives described in offering documents
  • Analysis of financial statements to ensure that payments are made in accordance with disclosures provided to investors
  • Review of all correspondence with investors and any marketing materials used to solicit investors
  • Assessment of suitability requirements and compliance with such mandates
  • Compliance with registration exemptions under the Securities Act of 1933 (including Regulation D), the Advisers Act, and the Investment Company Act of 1940

To complete this detailed review, ACA closely scrutinizes the following documents:

  • Operating Agreements
  • Private placement memoranda and other offering materials
  • Subscription agreements, including qualifying questionnaires
  • Capital Account Worksheets
  • Custodial Statements
  • Financial Statements
  • Correspondence between the adviser and investors, such as quarterly letters
  • Marketing materials designed to solicit additional investors or maintain current investors
    Regulatory filings, including Form D, filed with the SEC