Rumors of an extension of the hedge fund registration deadline are greatly exaggerated. On April 12th, an SEC official wrote to propose pushing back the deadline for hedge funds to register with the federal agency. So, is the July 21 deadline still on?
Advanced Trading spoke with Tom Westle, partner with Blank Rome, a law firm that advises hedge funds, to find out how hedge funds are dealing with the looming deadline and how some are cutting corners.
Advanced Trading: Has the hedge fund registration deadline been pushed back officially?
Tom Westle: Attorney for Blank Rome: No. As you may have seen, Robert Plaize was quoted as saying there might be a delay of the implementation of the effective date for registration. Nothing has happened since then. Many people are watching this and neither the SEC staff nor the Congress has put out anything publically whether or not they are going to delay the effective date.
AT: Are your hedge fund clients confused?
Westle: We get calls constantly from clients asking, "Well, what do you think we ought to do?" I don't think I would delay working on my Form ADV and my ADV Part 2 because of the time commitment. I wouldn't delay it. What's the worst that can happen? You'll have the document ready to go.
AT: Tell us about the Form ADV. Is this the form where I register my hedge fund?
Westle: No, you don't register your hedge fund; that is a misnomer. It's the adviser to the hedge fund who has to register. The fund still remains a private investment fund that doesn't have to register under the Investment Company Act of 1940. That has not been changed. Just the advisers have to register.
It's not just the registration. There are advisers that may not have the $150 million under management that requires them to fully register but there is information that must be filed with the SEC when an adviser hits $100 million. You don't have the full registration requirement but you still have to provide information.
AT: What defines an advisor?
Westle: It's the company itself that is contractually obligated to provide the investment advisory services. Often it is a limited liability company or a partnership depending on which law firm or adviser is setting up the fund. The senior management of the company is not the adviser for registration purposes -- the company itself registers as an adviser and then the individuals are listed as portfolio managers and their other titles and whether they have ownership or not is disclosed.
AT: What are clients asking about? Are they confused about the requirements?
Westle: The filing itself is pretty well set forth in the documents and a lot of it is responding to questions and describing the business. A lot of this is straightforward.
But when I say a lot is straight forward, that may not be the case to a lot of people in the hedge fund and private equity fund industry -- I don't want to use the term 'boiler plate' but the description of their businesses and the risks often take on a life of its own. People don't want to overly describe their business and what they are doing because it may include proprietary information. They want to make sure the descriptions and details are enough to fit the requirements of the form and you see people watching to see who has already filed. Some are watching to see which advisors filed and they review their disclosures and make their files similar to some of the others -- not identical -- but similar to make sure it works for their company.
AT: It's like kids at a swimming class and no one wants to be the first one into the cold end of the pool.
Westle: But once they're all in, they are all swimming on their own.
And it doesn't stop with registration. Once you are registered as an adviser and the Advisors Act of 1940 takes priority in their daily life, it's not just about providing performance for your clients and making deals at a good price. Compliance takes a very [important role].
Once it becomes required and you register, you need to have a written compliance policy and procedures. Now you have to adequately describe the procedures you follow to manage your business and you are pretty much giving a manual out there to the SEC. They can come in to your firm and say "how are you doing this?" and "how well are you doing this?"
AT: It sounds like you're not advising clients to put their feet on their desk and wait this out.
Westle: I don't know how they can do that when the date comes. You have to be registered on a specific date …. and everyone has had a lot of notice. Think about the kid at school who has two months to do a paper and then tells the teacher "I didn't know it was due today." Some of these people may be just like that. They are trying to [say] "the dog ate my homework."
AT: But European banks used these excuses when MiFID began in 2007.
Westle: Yes, they didn't read the book report and a good number of hedge funds didn't either. Now they are sitting down and saying "it is May and I have to get this filed" and they are calling their lawyers and asking what to do. The lawyers are saying "I may not know enough about your business for you -- you have to help me here."
Now the lawyers say "Tell me about your business so I can fill out the forms." Or better yet: fill it in and let me review it. And they look at you like a deer in headlights
The hedge fund managers ask, "Well, isn't there some boilerplate you can use to fill in the form?" And I say no, this is about your business -- I can help you formulate your responses but we had clients who took it upon themselves. Most clients say "we will do the first portion of this, we will spend X number of hours and we'll fill it in and you read it and tell us if it is okay and help us get it clear and we can then in fact file."
AT: These shenanigans happen even though hedge funds knew about the deadline?
Westle: I think there are plenty of people who are betting that some relief will be given either a delay in the requirement to be registered or delay the requirement once you are registered. I assume that there are a lot of people who are betting that something will happen. But I would not certainly bet my business on it.
If I was a long / short guy, I wouldn't take the bet on this one.
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio