K&LNG Update
FEBRARY 2006
Hedge Funds
Reminder: It's Annual Compliance Review Time
Pursuant to Rule 206(4)-7 of the Investment Advisers
Act of 1940, as amended (the “Advisers Act”),
advisers registered with the SEC are required to
create and implement written policies and procedures
to reasonably prevent violations of U.S. Federal
securities laws, to review those policies and
procedures annually (at a minimum) for their
adequacy and effectiveness and to conduct an annual
compliance review to test compliance with such
policies and procedures. A registered investment
adviser’s compliance program, for example, should
monitor portfolio management processes, trading
practices, valuation, proprietary trading, disclosures
to investors, maintenance of books and records,
safeguarding customer assets and information, and
contingency planning for business interruptions.1 In
one SEC examiner’s words: a “compliance program
cannot be static” and “[it] must be able to identify,
meet, and incorporate changes in [an adviser’s]
business and changes in [its] customers. . .”2
This Update outlines some common examples of
changes an adviser may experience over the course of
a year that could potentially require a revision to its
compliance program.
■
Changes in Valuation. An alteration of an
adviser’s investment strategy (e.g., a new
portfolio that invests in highly illiquid
investments that may have no readily
ascertainable value) may require a revision of
its valuation policy.
■
Trading in Commodities. Commencing new
investments in futures and options on futures
will require a determination of whether
registration with the National Futures
Association is appropriate for the adviser or if,
alternatively, registration can be avoided
pursuant to an exemption.
■
Expansion of the Adviser. As a firm expands
and delegation of duties shifts, firm-wide
access person designation may be unnecessary
or undesirable. A mid-level employee may
lack access to material information upon which
he or she could act.
■
New Issues. NASD Rule 2790 requires annual
verification of the restricted or unrestricted
status of each investor in an adviser’s fund.
The adviser should furnish each investor with
account information on record used to
determine that the account was initially eligible
(or ineligible) to purchase new issues. In the
absence of a status-changing reply, the adviser
may continue to treat the account as it was
originally designated.
■
Business Continuity Plan. A change in the
physical site of an adviser’s office may require
an update to its business continuity plan,
e.g., updating its service providers’ information
or creating a new list of employee contact
information.
1 Compliance Programs of Investment Companies and Investment Advisers, Investment Advisers Act Release No. IA-2204, 68 Fed.
Reg. 74714 (Dec. 24, 2003) at 74714.
2 Lori A. Richards, Remarks before the Investment Adviser Compliance Best Practices Summit: Compliance Programs: Our Shared Mission
(Feb. 28, 2005).
Kirkpatrick & Lockhart Nicholson Graham LLP |
FEBRUARY 2006
■
Anti-Money Laundering. It is likely that
proposed rules requiring registered investment
advisers, hedge funds, CPOs and CTAs to
establish anti-money laundering programs will
become final soon.
■
Soft Dollars. Any new business relationships
entered into between the adviser and a brokerdealer involving soft dollars warrant notice
during the compliance program annual review.
■
Proprietary Trading. An expansion of the
adviser’s investments into new marketplaces
may necessitate a commensurate restriction on
investments previously tradable for access
persons, i.e., additions to the adviser’s code of
ethics’ restricted list of investments.
■
Proxies. If an adviser’s new investments
generate proxies, the adviser should create a
proxy voting policy that treats all clients
equitably, including internal procedures for
receiving and voting the proxies, or
alternatively, retaining third party vendor
assistance.
2
■
Recordkeeping for the Annual Review Process.
Rule 204-2 under the Advisers Act requires
that any materials produced or utilized during
the annual compliance program review must be
maintained under the same standards for the
retention of “books and records,” i.e., five
years in total, the first two of which must be in
an office of the adviser.
*
*
*
While the above listed situations are some of the
more common ones advisers face during their annual
review of their compliance programs, generally, the
most important review should occur where obvious
failures of the compliance program occurred.
Kirkpatrick & Lockhart Nicholson Graham
LLP
|
FEBRUARY 2006
If you have questions or would like more information about K&LNG’s Hedge Funds Practice, please contact one of our
lawyers listed below:
BOSTON
Michael S. Caccese
Mark P. Goshko
Thomas Hickey III
Nicholas S. Hodge
George Zornada
WASHINGTON
617.261.3133
617.261.3163
617.261.3208
617.261.3210
617.261.3231
mcaccese@klng.com
mgoshko@klng.com
thickey@klng.com
nhodge@klng.com
gzornada@klng.com
LONDON
Philip Morgan
+44.20.7360.8123 pmorgan@klng.com
LOS ANGELES
William P. Wade
310.552.5071 wwade@klng.com
NEW YORK
Robert J. Borzone, Jr. 212.536.4029
Jeffrey M. Cole
212.536.4823
Ricardo Hollingsworth 212.536.4859
Beth R. Kramer
212.536.4024
Richard D. Marshall
212.536.3941
Keith W. Miller
212.536.4045
Scott D. Newman
212.536.4054
rborzone@klng.com
jcole@klng.com
rhollingsworth@klng.com
bkramer@klng.com
rmarshall@klng.com
kmiller@klng.com
snewman@klng.com
SAN FRANCISCO
Elaine A. Lindenmayer 415.249.1042
David Mishel
415.249.1015
Mark D. Perlow
415.249.1070
Richard M. Phillips
415.249.1010
elindenmayer@klng.com
dmishel@klng.com
mperlow@klng.com
rphillips@klng.com
Clifford J. Alexander
Diane E. Ambler
Mark C. Amorosi
Catherine S. Bardsley
Arthur J. Brown
Arthur C. Delibert
Jennifer R. Gonzalez
Robert C. Hacker
Kathy Kresch Ingber
Michael J. King
Rebecca H. Laird
Deborah A. Linn
Cary J. Meer
R. Charles Miller
Dean E. Miller
Charles R. Mills
R. Darrell Mounts
C. Dirk Peterson
David Pickle
Alan C. Porter
Theodore L. Press
Francine J. Rosenberger
Robert H. Rosenblum
William A. Schmidt
Lori L. Schneider
Lynn A. Schweinfurth
Donald W. Smith
Martin D. Teckler
Roger S. Wise
Robert A. Wittie
Robert J. Zutz
202.778.9068
202.778.9886
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202.778.9015
202.778.9214
202.778.9038
202.778.9874
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202.778.9096
202.778.9298
202.778.9324
202.778.9887
202.778.9186
202.778.9025
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kingber@klng.com
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cmiller@klng.com
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