If a hedge fund has had, in the preceding 12 months, more than 14 investors that are US residents, the offshore adviser to that hedge fund generally must register with the SEC under SEC Rule 203(b)(3)-2 Registration Under the Advisers Act of Certain Hedge Fund Advisers. With SEC registration comes the inevitable examination where SEC examiners (either alone or jointly with a local regulator) will want access to your policies and procedures, books and records and management personnel to assess compliance with applicable US rules and regulations. A major focus of the examination will centre on conflict management and how an organisation, identifies, monitors and mitigates conflicts of interests inherent in their business.

Typically, at the commencement of the SEC's fieldwork, they will speak with member(s) of senior management to obtain an overall view of the organisation, business, control environment, and compliance culture. They may also want to interview persons responsible for certain functions such as portfolio management, trade execution, back office/administration, information technology, anti-money laundering, and marketing.

Specifically, the SEC examination staff will be interested in determining whether:

1. Portfolio management decisions are consistent with client mandates and/or private placement memoranda;
   
   
2. Decisions made and costs incurred in maintaining registrant's brokerage arrangements and placing orders (trades) for clients are consistent with maximising the value of clients' accounts and disclosures made to clients;
   
   
3. Allocations among clients accounts of IPOs and blocked and cross trades in issues traded on secondary markets are fair and consistent with disclosures;
   
   
4. Prices used to value positions in clients' accounts reflect accurately current market conditions and the process used to calculate NAV per unit of commingled accounts results in consistently accurate allocations of the commingled accounts' net assets among participants;
   
   
5. Information provided to investors regarding transactions in and balances of their accounts reflects accurately the actual transactions in and balances of those accounts;
   
   
6. Personal trading activities of advisory representatives and proprietary accounts of registrant are consistent with codes of ethics, regulatory requirements, and disclosures;
   
   
7. Performance information used in advertisements and other marketing materials is calculated accurately and fairly and is used in ways that are not misleading; and
   
   
8. Data about registrant's operations and activity in investor accounts are accurately created, captured, and safeguarded from unauthorised access, use, and manipulation. Such data are used to provide accurate and timely information to management, advisory clients, investors, and regulators.

At the conclusion of the examination you will likely receive an exit interview and/or communication from the SEC examiners setting out areas of concerns and possible deficiencies. You should respond to any correspondence in a concise and accurate manner and within any time constraints set by the SEC.

The SEC have expressed an interest in working more collaboratively with registrants to jointly identify, assess and remedy industry issues in a timely manner and before they escalate into major issues. Such an approach would be widely embraced by many registrants, especially those undergoing such examinations for the first time.