The Securities and Exchange Commission has clarified that newly-registered hedge fund advisers will need to eliminate the use of certain services in order to comply with the SEC’s custody rule. In a letter to Deloitte & Touche, the SEC noted auditor independence rules ban services such as allowing an accounting firm to prepare hedge fund quarterly financial statements. The purpose of the guidance is to tell hedge fund advisers that they will need to build internal capabilities for services which they had previously outsourced to their accounting firms, said Anthony Artabane, partner at PricewaterhouseCoopers, which along with all the Big Four firms participated in drafting the Deloitte & Touche letter seeking SEC guidance. The SEC’s guidance was in the form of a no-action letter. It stated the SEC will not bring an enforcement action against any newly registered hedge fund adviser that relies on an audit performed by an accountant that has performed services violating the SEC’s auditor independence rules. But in order to fall within the no-action relief, the hedge fund adviser must meet the condition of discontinuing use of the services by June 30, 2007.
Due to their small size, many hedge fund advisers have historically lacked the internal resources to prepare their own financial statements and have requested the audit firm to prepare them, the letter seeking SEC guidance stated. Hedge funds have also hired personnel from the accounting firms under conditions the independence rules prohibit, the letter said. The auditors of most hedge funds have relied on the American Institute of Certified Public Accountants’ auditor independence standards, which are less restrictive than SEC rules. Other accounting firms that signed onto the request letter included BDO Seidman, Goldstein Golub Kessler and Grant Thornton.
Hedge funds are required to indicate in the footnotes to their financial statements that the accountant was not independent under the SEC’s rules and the reasons why the accountant was not independent, the SEC stated in its letter. Calls to Brian Bullard, chief accountant who signed the SEC letter, were not returned by press-time. Calls to Ballard were referred to John Heine, SEC spokesman, who declined comment.