With the deadline to register with the Securities and Exchange Commission less than three months away, consultants and other hedge fund experts are urging fund managers to get ready-and fast.

That's because July 21 isn't the deadline for hedge funds to send their registration report. It's the date by which the SEC must approve a fund's registration, so it avoids either being fined or shut down completely.

Hedge funds really need to be prepared-and apply for registration-at least a month in advance to give themselves ample time to close any reporting gaps the SEC finds.

That means by June 17 at the latest, thousands of start-up and existing hedge fund managers not will not only have to fill out the correct paperwork, but also meet the SEC's documentation, technology and operational requirements to prove they have solid procedures in place to either prevent errors or quickly fix them. Under the Dodd-Frank financial reform legislation, advisors with hedge fund assets alone of over $150 million must register or with asset assets of $100 million in both hedge funds and separately managed accounts.

The price tag: easily over $100,000 to fill out the reports and design the compliance manual. That doesn't include compensation for a new chief compliance officer, which could be $300,000 annually, or the cost of buying a basic portfolio management system to keep books and records system, estimates Boston-research firm Aite Group. That could come to over $1 million for a large hedge fund.

Although the SEC recently suggested it might postpone the deadline until the first quarter of 2012, betting on such an extension isn't wise. "It's not certain whether the SEC will extend the timetable for registration," warned Douglas McLean, director of Armor Compliance, an advisory firm in Boston specializing in hedge and private equity funds. "Depending on their size and the maturity of their operational and technological infrastructure, hedge fund managers will face varying challenges in meeting their new regulatory mandate."

Completing Form ADV involves a lot more than checking off boxes. The SEC wants written disclosures of fees, conflicts of interest and policies governing operational work, disaster recovery plans and trade allocations. Such an endeavor can't be done overnight. After all, this often involves a group effort among internal compliance, trading, finance and operations executives, as well as legal counsel.

"Compliance officers will need input from chief financial officers, operations and IT executives." McLean said. That means collecting the data from multiple internal applications such as trade execution, order management, risk analytics and portfolio accounting programs to name a few.

Of the 18 items that must be included in part two of Form ADV-otherwise known as "the brochure"-four will require additional work for operations and IT executives: fees and compensation; methods of analysis; investment strategies and risk of loss; performance-based fees and side-by-side management. Operations and IT executives must explain the logic behind the fund manager's trade order management system to decide which percentage of a block trade is allocated to which fund and in what amount. Those executives must also explain the potential for loss resulting from trading errors, mistakes in valuing non-exchange traded securities and the loss of data due to a power outage or other mishap.

"Because Form ADV will be publicly available, advisors must be mindful of how much they wish to reveal for competitive reasons," said Theodore Eichenlaub, a partner at ACA Compliance Group, a consultancy in Morristown, N.J., specializing in registered investment advisers and broker-dealers.

Next up: preparing for an SEC audit. Just because the SEC gripes about its limited resources, hedge fund managers shouldn't presume they will fall under the radar. The Investment Advisers Act of 1940 authorized the SEC to conduct exams of registered advisers to search for any inadequacies between the actual practices of the hedge fund and what it has promised in its compliance manual.

"There is usually one person who owns the project of writing the manual and a group of business line executives in the trading, operations and finance units helping out," Eichenlaub said. "Hedge funds will need to develop a robust governance model, which includes appointing a chief compliance officer."

The governance model involves selecting who will be in charge of ensuring that each critical function of the hedge fund runs smoothly. That includes trading, middle-office risk management and valuations, and back-office clearance and settlement. Just as important is outlining the procedures that executives should take when discovering an error-including notifying investors and compensating them for any losses.

Valuation policies are particularly critical for semi- or illiquid securities such as over-the-counter derivatives, collateralized debt obligations and private equity assets. That is because fund managers must show how they priced an asset for which there is no ready-made market.

Preparing for the registration process involves more than just documentation. Hedge fund managers also will need to buy the appropriate software to price exotic securities and calculate net asset values. Measuring market, liquidity risk and counterparty risk will become critical to proving operational soundness not only to the SEC, but investors as well. IT packages typically provide an audit trail validating the decision making process and the data used.

"There has already been a shift over the past few years to maintaining books and records in-house to prove fund administrators and other service providers are making correct calculations," said Jeffrey Axelrod, chief executive of Cogency, a Burlingame, Calif., software firm specializing in funds of hedge funds technology. "In the event of a major market downslide or other unforeseen market event, the hedge fund can also quickly estimate how it was impacted."

A study of 223 hedge funds conducted by Eze Castle Integration, showed that hedge funds are placing more importance on their front-, middle- and back-office operations and technologies in light of the potential registration requirements. Among the most popular purchases are e-mail and instant message archiving systems, said Bob Guilbert, managing director of the Boston-based firm specializing in hedge fund technology (See "Archiving E-Mail & Other Tech Tips From Hedge Funds," page 1).

Other popular technology choices: front-office order management systems, market data feeds and market analytics.

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