You can tell good SEC speeches from bad ones.  The good ones always have a 'Top Ten List" or some sort of takeaways that impart practicable information, like hot-button regulatory priorities or best practices in the industry. And, of course, the SEC Deputy Director for OCIE, Norm Champ did a solid by providing his Top Ten Takeaways for RIAs to Hedge Funds.  If you read the first part of this story [see Tuesday's BTN posting], then you know Mr. Champ provided his views last week to members of the New York City Bar. The first of this Two-Part Story covered the following:

• 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.
• 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.

Areas for Management at Hedge Fund Advisers to Consider.

• 1. Review your control and compliance policies and procedures annually. As a new registrant, you should undertake a comprehensive review of your operations to identify any gaps to your control and compliance policies and procedures.
  • Make sure that they work for your organization.
  • Update them if you have changes in your firm’s activities or products.
  • Assign responsibility to specific persons/positions for maintaining the procedures.
  • Periodically test and verify procedures - e.g., test and verify your valuation procedures and make sure your firm is consistent and following its procedures, especially for complex or illiquid securities.

• 2.  Assess and prepare for Form PF requirements. Form PF may require voluminous data.  Hedge fund advisers may find that they do not maintain or collect all of the information that is required.  Much of the information may be located in various places throughout the firm and some effort may be required to collect and report the information.  Therefore, you need to begin now to identify the sources within the business where the data resides, determine how to best capture such data, collect and compile the data, and assure its accuracy.

• 3.  Identify risks. Brainstorm any factors that create risk exposure for your clients and your firm.

• 4.  Enhance your expertise. Make sure your employees are knowledgeable about their work and that you have enough expertise to oversee what goes on.  Continue to update and train your employees about new rules and procedures applicable to your firm and its products.

• 5.  Verify client assets. Be aware that examiners may verify some or all of your assets and the possibility that the exam staff will reach out to 3rd  parties and possibly clients in this process.  Make sure your organization has done adequate due diligence in connection with 3rd parties, including consultants and service providers.

• 6.  Get rid of any silos, identify conflicts. Get rid of silos and open communication among divisions and offices where appropriate and legally possible.  I realize that in some situations barriers between certain areas of a firm are required legally.  In particular, identify any situations where your interests may conflict with those of your clients.  Make sure you manage those conflicts and disclose them to your clients.

• 7.  Provide clear, complete, and accurate disclosure in performance and advertising. Make sure you’ve made complete and accurate disclosure about performance, arrangements, fees, affiliates and affiliated transactions.  Review marketing documents, client communications and questionnaire responses to ensure information is truthful, accurate and not misleading now that the JOBS Act permits general solicitation.  Verify that fees are calculated correctly and accurately disclosed.  Make sure you can trust the information, both external and internal, upon which you rely.

• 8. Verify portfolio management compliance. Review client account holdings for appropriateness.  Review trades for unusual performance relative to peers and markets.  Compare trades to restricted lists and determine if trades were made ahead of publicly available news or research reports.

• 9.  Address your complaints. For complaints, make sure your procedures provide adequate instructions on handling them, and follow up to make sure they have been resolved.

• 10.  Check your IT security. Check your IT security to ensure that clients’ assets and information are not at risk.

For further details, go to:  [SEC Staff Speeches (Norm Champ, 5/11/12].