[ By Howard Haykin ] Title IV of the Dodd-Frank Act eliminated the private adviser exemption.  As a result, these private advisers - including those servicing hedge funds and private equity funds, now are subject to the same registration, regulatory oversight and other requirements - e.g., periodic examinations - that apply to other SEC regulated investment advisers, or "RIAs."  Such private advisers were required to register with the Commission by 3/30/12. Using the new registration requirements as a backdrop for a speech last week to members of the New York City Bar, the SEC's Norm Champ - Deputy Director for OCIE, or Office of Compliance Inspections and Examinations - discussed what the SEC registrations means for, principally, Hedge Fund Advisers.  Mr. Champ covered 3 topics:

• First, provisions of the Dodd-Frank Act that are applicable to private fund advisers, specifically hedge fund advisers, and what the Commission staff and the National Examination Program have been doing to prepare for these new registrants - including statistics and observations.

• Second, several key requirements under the Advisers Act, and some important considerations for newly registered hedge fund advisers - namely, (i) fees, (ii) conflicts of interest,  and (iii) risk management.

• Third, areas for management at hedge fund advisers to consider.

National Examination Program Preparations. By early April, the SEC had under registration about 4,000 IAs that manage one or more private funds.  Of these, more than 1,350 IAs (or 34%) had registered with the SEC since the effective date of the Dodd-Frank Act, 7/21/11.  This represents a 52% increase in registered private fund advisers.  Some other observations:

• 32% of all advisers currently registered with the SEC report that they advise at least 1 private fund;
• of the registered private fund advisers, some 284 or 7% are domiciled in a foreign country;
• most of these (136) are in the U.K.;
• registered private fund advisers report on Form ADV that they advise approximately 30,000 private funds with total assets of $8 trillion - representing 16% of total assets managed by all RIAs.

Based on available information, OCIE believes that 48 of the 50 largest hedge fund advisers in the world are now registered with the SEC, 14 of which are new registrants. New Reporting Obligations. Pursuant to Dodd-Frank, the SEC also adopted a rule requiring RIAs - including advisers to hedge funds, PE funds and liquidity funds - with at least $150 million in private fund assets under management ("AUM") to periodically file a new reporting form, Form PF. Information contained in Form PF will be used by the Financial Stability Oversight Council (FSOC) to monitor risks to the U.S. financial system and by the SEC to conduct risk assessments of private fund advisers.  The type of information to be disclosed and the frequency of filings will depend on whether the IA is an adviser to PE funds, hedge funds or liquidity funds, and whether the IA is a "large private fund adviser" - i.e., with AUM of $1.5 billion or more in hedge fund. Most hedge fund advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after 12/15/12.  Hedge fund advisers, with AUM of at least $5 billion that's attributable to hedge funds, must begin filing Form PF following the end of their first fiscal year or quarter, as applicable, to end on or after 6/15/12. Smaller hedge fund advisers will be required to file only annually within 120 days of the end of their fiscal year. Large hedge fund advisers will be required to file quarterly, within 60 days after the end of each fiscal quarter. National Examination Program’s Plan for New Registrants.   Based on evaluations of various data, including Form PF information and attendant risk factors,  NEP's strategy for new registrants will include:

• an initial phase of industry outreach and education like today (sharing our expectations and perceptions of the highest risk areas),
• followed by a coordinated series of examinations of a significant percentage of the new registrants that will focus on the highest risk areas of their business and help us to risk rate the new registrants, and,
• culminating in the publication of a series of "after action" reports, reporting to the industry on the broad issues, risks, and themes identified during the course of the examinations.
• All of this will be planned and executed in consideration of the substantial existing responsibilities of the examination program with the goal, as always, of ensuring that we are optimally allocating our resources to fulfill the OCIE mission to improve compliance, prevent fraud, inform policy, and monitor industry-wide and firm-specific risks.

Important Considerations for Registered Hedge Fund Advisers.   The Advisers Act imposes important obligations on newly registered advisers.  Upon registration, advisers to hedge funds must comply with all of the applicable provisions of the Advisers Act and the rules that have been adopted by the SEC.  Among other things, this means adopting and implementing written policies and procedures ("WSP's"), designating a chief compliance officer ("CCO"), maintaining certain books and records, filing annual updates of Form ADV, implementing a code of ethics and ensuring that advertising and performance reporting complies with regulatory rules.  Advisers are subject to examination by the SEC, to ensure that these required compliance obligations have been adequately carried out. The “Books and Records Rule”, for example, requires RIA, including hedge fund advisers, to make and keep true, accurate and current certain books and records relating to the firm’s investment advisory business.  Generally, most books and records must be kept for 5 years from the end of the year created, in an easily accessible location.  Form ADV Updates - Rule 204-1 of the Advisers Act requires RIAs to complete and file an annual update of Part 1A and 2A of the Form ADV registration form through Investment Advisers Registration Depository (IARD).  Advisers must file an annual updating amendment to Form ADV within 90 days after the end of the firm’s fiscal year.  In addition to annual filings, amendments must promptly be filed whenever certain information contained in the Form ADV becomes inaccurate. The “Code of Ethics Rule” requires a registered adviser to adopt a code of ethics which sets forth the standards of business conduct expected of the adviser’s supervised persons and must address the personal trading of their securities. The “Advertising Rule” prohibits advertisements by registered advisers that are false or misleading or contain any untrue statements of material fact.  Advertising, like all statements made to clients or prospective clients, is subject to the general prohibition on fraud under section 206 of the Advisers Act as well as other anti-fraud provisions under the federal securities laws. In addition to specific regulatory requirements, SEC Staff also has indicated its view that, if you advertise performance data, the firm should disclose all material facts necessary to avoid any unwarranted inferences. Special Considerations for Hedge Fund Advisers.   RIAs are "fiduciaries" to their advisory clients - the funds, which imposes a fundamental obligation to act in the best interests of their clients and to provide investment advice in their clients’ best interests. Investment advisers owe their clients a duty of loyalty and good faith.  Advisers to hedge funds should consider some of the following issues: Fees/Expenses: As fiduciaries, hedge fund advisers must allocate their fees and expenses fairly.  Firms must disclose those fees it plans to charge its customers, and any methodology for allocating expenses between the firm and its client funds.  Advisers should ensure the timeliness, accuracy and completeness of such reporting.  A firm’s disclosure policies and procedures should address the allocation of their fees and expenses. Particular caution should be exercised when deals are undertaken among funds under common management and affiliated entities.  In cases where 2 funds managed by the same investment adviser co-invest in the same investment vehicle, expenses should be allocated fairly across both funds. Conflicts of Interest: Hedge fund advisers should ID any conflicts presented by the type and structure of investments their funds typically make, and ensure that such conflicts are properly mitigated and disclosed.  Advisers of pooled investment vehicles also have a duty to disclose material facts to investors and prospective investors and failure to do so may constitute fraud. Risk Management: Hedge fund advisers must evluate their risk management structures and processes by asking themselves the following types of questions:

• Do the business units manage risks effectively at the product and asset class levels in accordance with the tolerances and appetites set by the board and senior management of the organization?
• Are the key control, compliance and risk management functions effectively integrated into the structure of the organization while still having the necessary independence, standing and authority to effectively identify, manage and mitigate risk?
• Does the firm’s internal audit processes independently verify the effectiveness of the firm’s compliance, control and risk management functions?
• Do senior managers effectively exercise oversight of enterprise risk management?
• Does the organization have the proper staffing and structure to adequately set its risk parameters, foster a culture of effective risk management, and oversee risk-based compensations systems and the risk profiles of the firm?

For further details, go to:  [SEC Staff Speeches (Norm Champ, 5/11/12]. That concludes Part One. Part Two, to be posted Wednesday, will cover to following:  [Take Aways for IAs of Hedge Funds].