Recently registered hedge fund advisers are worried about the consequences of failing to meet the deadline in the Securities and Exchange Commission's custody rule on financial audits. The rule requires IAs with custody of client assets to ensure their custodian delivers account statements to clients on a quarterly basis. Hedge fund advisers with pooled investment vehicles, however, are exempt from the requirement for quarterly statements so long as they distribute audited statements within 120 days of the close of the fiscal year. "The SEC will give you a slap on the wrist the first time," said Irwin Latner, partner at Herrick Feinstein in New York. The SEC will be more forgiving if the adviser can show it missed the deadline due to unforeseen consequences, he said.

The question is how the advisers evidence their intent to meet the deadline if they miss it, said Theresa Messina, partner and head of Asset Management Advisory Services at Ernst & Young in New York, who added she gets frequent calls from advisers asking about it. But the SEC will give the advisers a harder time if they continue to miss the deadline and tell them they could lose their exemption in the custody rule, Latner said.