SEC requests industry group help in training

Oct 24, 2005 @ 12:01 am

By Vineeta Anand

WASHINGTON - The Securities and Exchange Commission has asked the hedge fund industry to help train SEC staff to inspect the estimated 1,260 hedge fund investment advisers expected to register by February.

The SEC's office of compliance inspections and examinations has called upon members of the

Washington-based Managed Funds Association, which represents the hedge fund industry, to speak at training sessions the SEC has begun to hold for its staff in preparation for when a new rule kicks in next February.

The rule requires all hedge fund advisers with more than 15 U.S. investors and $30 million under management to register with the securities regulator, subjecting them to periodic ADV disclosure filings, fiduciary duties to clients, the requirement to hire a chief compliance officer and examination by the SEC staff.

One way out

Hedge fund advisers may circumvent the registration requirements if they agree to lock up investors' money for at least two years.

Commissioners Roel C. Campos and Paul Atkins have both referred to the MFA's involvement in recent speeches.

The training sessions will continue through June 2006, said Lori Richards, director of the SEC's compliance inspections office.

After the initial training, the SEC will continue with programs for its examiners to ensure that they stay up to date in their expertise.

Because the SEC adopted a risk-based approach to all examinations some years ago, SEC examiners can be expected first to inspect hedge fund advisers thought to pose the greatest risk to investors. Ms. Richards declined to say how the SEC will determine the risk levels of hedge fund advisers.

"We provided significant input for their syllabus that would be used for the training program, and I believe they found it very helpful," said Stephanie Pries, vice president and general counsel at the hedge fund trade association.

That kind of consultation with the industry association should help SEC examiners become more knowledgeable about the way hedge funds operate, said a former SEC lawyer, who asked not to be identified.

"Realistically, the only way you can understand how an industry operates is by talking to the people in the industry," he said.

"Of course, nobody from the MFA is going to come in and say, 'Here's where the bodies are buried; here's where you should start digging.'"

The former SEC lawyer added that trade associations typically represent the more ethical members of an industry.

The SEC's training program consists of 19 biweekly training modules for examiners and runs the gamut on industry overview, structure, objectives, strategies and style, differences between hedge funds and mutual funds, valuation, portfolio management, legal questions and taxation.

It also covers prime brokers, service providers and risk management, and controls concerning credit and leverage, Mr. Campos said in a Sept. 14 speech before the Securities Industry Association's hedge fund conference in New York. The SIA is based in New York and Washington.

He also said the training program will cover the use of outside administrators and auditors, valuation techniques, distribution activities and communications with investors.

"We provided them a guideline on the different strategies that are out there," Ms. Pries said.

Others invited

The SEC has also asked academics, lawyers, accountants and other experts to speak at its training sessions, Ms. Richards said.

Meanwhile, SEC staff members have also enrolled in a chartered alternative investment analyst accreditation program at the Isenberg School of Management at the University of Massachusetts in Amherst, said Nelson Lacey, director of examinations.

The program has two levels; candidates who pass both levels receive the CAIA designation, the industry's equivalent of the Good Housekeeping Seal of Approval. About 350 people have received those credentials since the program began three years ago, although not all of them work in the hedge fund industry, Mr. Lacey noted.

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