professionals who have the experience of making detailed, frequent filings to regulatory bodies and ratings agencies. This can help determine how to access the required information quickly and give a sense of how to design processes to deliver the information more easily in the future.
Conducting a trial exam The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), sections of which are implemented by the new Form PF rule, also amended the Advisers Act to require investment advisers of hedge funds and private equity funds of more than $150 million to register with the SEC. With the required registration, private fund advisers are subject to the SEC’s regulatory oversight, rules and, possibly most worrisome, examinations. These exams can be challenging, and time- consuming.
Careful planning for compliance scrutiny is vital to ensure readiness
for this possibility. Long before hearing from the SEC, firms should create an examination strategy for achieving full regulatory compliance, for engaging the right response team to participate, and for making sure all books and records are up to date.
“Investment advisers registered with SEC who manage private funds will be required to report risk exposure on a consistent basis, starting in June 2012, on what’s known as Form PF.”
under management and venture capital funds, however, are not required to report on Form PF.
Form PF will require considerable time and effort as it is a
process, not a report, and demands the obtaining of extensive information. Firms are well advised to begin the process quickly in order to file on a timely basis.
“Form PF is not something which most advisers can complete
over the weekend before its due date. It will require much time, effort, and advance planning in order to complete accurately,” says Jeffrey Short from Ernst & Young in the Cayman Islands.
Navigating Form PF can be daunting, as it requires investment
advisers to collect and report data that they may never have collected before. For example, many firms don’t stress-test portfolios uniformly across the various funds they manage. Funds may only stress-test certain portfolios for major exposures. There are many types of data that may be calculated but are not widely disseminated to investors or calculated on a consistent basis from one fund to another. Advisers who file Form PF will have to devote considerable time and effort to ensure the relevant data for these questions are indentified, verified, aggregated, and stored.
As the SEC works out the kinks in Form PF, investors are likely
to begin to ask for access to the data in order to make meaningful comparisons between possible investment alternatives. Though it means more resources and effort, the effort may provide valuable results in investor relations.
To make this turning point easier for private fund advisers, it’s a good idea to seek out expertise. It’s advisable to work with
38 CAYMAN FUNDS | 2012 About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, visit
www.ey.com
Ernst & Young Ltd (Bermuda), Ernst & Young and Ernst & Young Ltd (Cayman) are client-serving member firms of Ernst & Young Global Limited operating in Bermuda, the Bahamas, the Cayman Islands and the British Virgin Islands, respectively.
With a comprehensive plan in place, firms will be in a position
to react in a timely and responsive manner to examiner requests for information, as well as to their criticisms. This can make the overall process less painful—and, perhaps, less frequent.
The best way for a firm to know that its exam strategy is
effective is by doing a trial run. A mock examination will validate the readiness of a firm’s programmes and personnel to regulatory scrutiny, reveal any problems with the plan and help them to be addressed quickly.
Given the scope and depth of the examination, it is often smart
to hire an experienced service provider to conduct the mock exam to test and evaluate all facets of a firm’s compliance programme. Ernst & Young routinely gets involved with examinations of a client’s operating procedures and understands the key areas of focus during an SEC examination. As a result, being the market leader in serving the hedge fund industry, Ernst & Young is in a unique position to add value to firms getting ready for an examination.
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