Compliance with SEC

registration requirements:
An implementation playbook

Contents
2 Overview and background
3 Our approach to becoming a registered
investment adviser
4 Our approach to organizing the transition
In light of the pending implementation of provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), Grant Thornton LLP has
developed this SEC registration “playbook” to outline a structured approach toward
registering with the SEC under the Investment Advisers Act of 1940 (Advisers Act). This
playbook defines the tasks and milestones required to register and operate as a registered
investment adviser, and can be customized to fit your specific business model.

6 The investment adviser registration process

itself: Form ADV and Form PF

7 Post-registration compliance activities

8 Why Grant Thornton?

Compliance with SEC registration requirements: An implementation playbook

Overview and background
The Dodd-Frank Act represents a
significant change in the American
financial regulatory environment
affecting all federal financial regulatory
agencies and almost every aspect of
the nation’s financial services industry.
Included in the Dodd-Frank Act is
the Private Fund Investment Advisers
Registration Act of 2010 (Registration
Act). This act removed previous
exemptions from registration for private
equity funds and other private funds
and enhances the SEC’s recordkeeping,
reporting and inspection authority
over registered investment advisers
and the private funds that they advise.
However, certain advisers are exempt While these provisions are slated to
to the registration requirements of the become effective on July 21, 2011, SEC
Registration Act, as follows: staff indicated it will consider allowing
• Advisers to venture capital funds additional time for investment advisers to
• Foreign private advisers1 register and comply with the obligations
• Advisers to certain private funds (e.g., of a registered adviser until the first
those with less than $150 million quarter of 2012. Once the provisions
assets under management and that are put into effect, all private funds (e.g.,
solely advise private funds) private equity funds and hedge funds)
• Advisers who solely advise licensed with more than $150 million in assets
small business investment companies under management will be required to
(SBICs) be registered with the SEC. Prior to
• Intrastate advisers registration, funds should have previously
• Advisers registered with the assessed their operations, developed and
Commodity Futures Trading implemented their compliance programs,
Commission (CFTC) policies and procedures, and submitted
their Form ADV.

The Dodd-Frank Act represents a significant change in the American financial regulatory
environment affecting all federal financial regulatory agencies and almost every aspect of
the nation’s financial services industry.

1
Defined in Section 202 (a)(30) as “means an investment adviser who – (A) has no place of business in the United States; (B) has, in total, fewer than 15 clients and investors in the United States in
private funds advised by the investments adviser; (C) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised
by the investment adviser of less than $25,000,000, or such higher amount and the Commission may, by rule, deem appropriate in accordance with this title; and (D) neither (i) holds itself out
generally to the public in the United States as an investment adviser; nor (ii) act as (I) an investment adviser to any investment company registered under the Investment Company Act of 1940; or (II)
a company that has elected to be a business development company pursuant to Section 54 of the Investment Company Act of 1940 and has not withdrawn its election.

2
Compliance with SEC registration requirements: An implementation playbook
Our approach to becoming a registered
investment adviser
Becoming an SEC-registered investment
adviser is a three-step process:
1. Plan your transition and define
the functions that support the
requirements of becoming an SEC-
registered investment adviser.
2. Implement the necessary financial,
operational and regulatory functions
to maintain compliance with all
necessary rules and regulations.
3. Establish an Investment Adviser
Registration Depository (IARD)
account and complete Form ADV to
register with the SEC.
To keep your transition on target,
your firm should be reaching and
monitoring key milestones, such as
performing a gap analysis, appointing a
chief compliance officer, and completing
and enhancing the setup of internal
functions, including compliance, legal
and finance areas. In addition, your
firm should upgrade and/or enhance the
operations and IT functions needed to
comply with additional reporting and
disclosure requirements.
Each private equity firm is unique
and has its own set of challenges in
the transition to becoming a registered
investment adviser. All firms, however,
will need to comply with a core set of
requirements.
We typically advise firms to take the
following steps. Grant Thornton can
provide assistance in each of these areas
as needed:
• Conduct a benchmarking assessment
of your current compliance
infrastructure against key aspects
of the requirements of the SEC
investment adviser registration
process.
• Create a communications approach
to monitor all of the required tasks
and milestones associated with the
registration process.
• Utilize standardized tools and
templates to lend structure to the
process.
• Establish general policies and “tone
from the top” necessary for the
transition to operating as a registered
investment adviser.
• Develop and implement required
compliance policies and procedures,
a code of ethics and other
documentation.
• Upgrade systems where necessary
to produce required filings, financial
reports, disclosures, and books and
records.
• Complete the investment adviser
registration process and implement
post-registration compliance
monitoring.
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Compliance with SEC registration requirements: An implementation playbook
Our approach to organizing the
transition
The first step in preparing for your
transition is to organize the tasks,
resources and timelines required to
become a registered investment adviser.
The Grant Thornton approach includes a
set of tools that will allow you to quickly
identify control gaps and to organize the
tasks that will be running simultaneously
throughout this transition.
To complete the plan, you will work
with our professionals to assign resources
to the required tasks, customize templates
applicable to your organization and
customize a schedule that will allow us
to communicate a comprehensive
project status.
The transition process requires
that personnel across all of your firm’s
departments meet regularly to complete
the regulatory, financial, legal and
operational requirements:
• Managing partners must provide overall
guidance and direction to the project.
• Your firm’s CFO is responsible for
financial reporting and records.
• General counsel must provide
oversight in completing regulatory
applications.
The first step in preparing for your transition is to
organize the tasks, resources and timelines required to
become a registered investment adviser.
• The chief compliance officer
(CCO) is responsible for overseeing
compliance efforts.
• Financial and operations management
is responsible for financial
management and reporting.
In order for your firm to become
a registered investment adviser, the
Compliance Programs Rule (Rule 206(4)-
7) requires that you appoint a CCO,
create and implement written policies and
procedures (including a code of ethics)
that are designed to reasonably prevent
violations of the Advisers Act, as well as
conduct an annual review of compliance
policies and procedures.
Since the CCO will be the point
person for SEC examinations, careful
steps must be taken to ensure that
the appointee is knowledgeable and
competent regarding the Advisers Act,
related rules and SEC interpretative
guidance. Depending on the size of
your organization, the CCO may be an
existing employee or an outsourced one.
Regarding compliance requirements,
your firm’s documented policies
and procedures — in the form of a
compliance manual — must be developed
or enhanced to include the additional
compliance requirements expected of a
registered investment adviser. A number
of key items should be included or
enhanced in your compliance manual:
• Anti-money laundering program
• Business continuity plan
• Regulatory reporting (Form ADV)
• Privacy policies and procedures
• Advertising and marketing policies
and procedures
• Assignments of investment advisory
contracts
• Education and training
• Recordkeeping and retention
requirements
Your code of ethics (Rule 204A-1)
outlines your standards of conduct,
covers disciplinary actions and
complaints, and addresses the topics
such as your firm’s policy on receipt of
gifts by employees and payments made
by government officials (pay-to-play).
Once finalized, the CCO must receive
written acknowledgement of receipt
of the code and any amendments from
supervised persons. In addition to the
gift policy, some key items to include in
the code are general fiduciary principles,
employee trading, annual certifications,
confidentiality and disclaimers.
4
Compliance with SEC registration requirements: An implementation playbook
Once put into place, Rule 206(4)-7
requires that each registered adviser
review its policies and procedures
annually to determine their adequacy and
the effectiveness of their implementation.
The review should consider any
compliance matters that arose during
the previous year, any changes in the
business activities of the adviser or its
affiliates, and any changes in the Advisers
Act or applicable regulations that might
suggest a need to revise the policies or
procedures. It’s important to note that
newly registered investment advisers will
need to design a compliance program
that is appropriate for their business. An
effective compliance program should
include the following:
• identifying and assessing the risks of
the firm;
• implementing effective policies and
procedures; and
• creating policies and procedures that
address and allow each risk to be
effectively managed.
Key rules and regulations
The following key rules and regulations
apply to the compliance functions of a
registered investment adviser. We will
work with your CCO and related staff
to prepare for compliance with these
rules upon your transition to a registered
investment adviser:
• Conflict of interest — Section 206 of
the Advisers Act imposes a fiduciary
duty on investment advisers, by
operation of law (Rule 206(4)-8).
• New investor onboarding — An
adviser cannot charge a performance-
based fee to a U.S. client except to
qualified clients (Rule 205-3).
In relation to the transition, Custody
Rule 206(4)-2 stipulates that a registered
investment adviser has “custody” if it is
the general partner, managing member or
has any authority to obtain possession of
client funds or securities. Accordingly,
almost all private fund advisers are
deemed to have “custody.” Furthermore,
all funds and securities (except for certain
uncertificated securities) must be held
by a qualified custodian (i.e., a bank or
broker-dealer). If the adviser or a related
person acts as the qualified custodian
of client assets, the adviser must obtain
an internal control report (Type II SAS
70 or SSAE 16 for reporting periods
beginning on or after June 15, 2011).
Additional disclosure requirements to an
adviser’s registration statement on Form
ADV are relative to the adviser’s custody
arrangements. Finally, the adviser may
avoid the surprise exam if the fund has an
unqualified U.S. GAAP audit (performed
by a Public Company Accounting
Oversight Board-registered and -inspected
firm) and distributes the audited financials
within 120 days or 180 days for fund of
funds or 260 days for fund of fund of
funds, with the audit deemed to meet the
surprise exam requirements.
According to recordkeeping rules
(Rule 204-2), books and records relating
to your advisory business must be kept
for a period of five years (with records
from the first two years kept onsite).
Emails and electronic communications
should be treated in the same manner as
physical (paper) records and should be
kept in an easily searchable format, as the
SEC will usually request emails of key
management during an examination.
Rules related to marketing define
an advertisement as any written
communication, including websites,
which is addressed to more than one
person for the purpose of maintaining
existing clients or soliciting new clients.
An advertisement may not contain any
untrue statement of material fact or
otherwise be misleading or use or refer to
client testimonials.
5
Compliance with SEC registration requirements: An implementation playbook
The investment adviser registration
process itself: Form ADV and Form PF
After making all the preparations, it is
time for your firm to formally register
through online forms. For Form ADV,
it is necessary to establish an Investment
Advisers Registration Depository
(IARD) account and complete Form
ADV Part 1 online. This section requires
information about the investment
adviser’s business, ownership, clients,
employees, business practices, affiliations
and any disciplinary events of the adviser
or its employees. The SEC will typically
approve the filing within 45 days.
ADV Part 1 must be updated annually
as an amendment to Form ADV Part 1
(due within 90 days after fiscal yearend).
As of Jan. 1, 2011, Form ADV Part 2A
must be filed with the SEC and will
be made publicly available on the SEC
website. Part 2A must also be updated at
least annually and was recently amended
to require a new narrative format and
additional required disclosures. These
disclosures describe the adviser’s
investment services and related conflicts
of interest, including disclosures with
respect to the adviser’s specific advisory
services; fee schedules; assets under
management; expenses; clients; conflicts;
strategies and risks; financial industry
affiliations and activities; referrals; and
disciplinary information.
Form ADV Part 2B is a supplemental
brochure with biographical information
concerning the education, business
background, disciplinary history (if
any) and other business activities of
certain advisory personnel — parties
who formulate investment advice and
have direct client contact or make
discretionary investment decisions for
clients’ assets.
Form PF, which is currently being
proposed by the SEC, would be
completed online and would be required
for investment advisers registered with
the SEC that advise one or more private
funds. Large private fund advisers
($1 billion or more in hedge fund,
liquidity fund, registered money market
fund, or private equity fund assets under
management) would file on a quarterly
basis, while smaller private fund advisers
would file annually. Data concerning
exposures by asset class, geographical
concentration, extent of leverage incurred
by the funds’ portfolio companies,
the use of bridge financing, the funds’
investments in financial institutions
and turnover will be reported on an
aggregated basis. In addition, investor
concentration data must be disclosed.
The SEC may decide to perform an
examination shortly after Form ADV is
approved. To complete an investigation,
the SEC gathers background information
before the examination from sources
such as your firm’s Form ADV, website
and reports released by the press. The
examination can begin with a surprise
visit or with advanced notice (via mail
and email correspondence) notifying
you of the inspection date (usually one
to two weeks in advance). Documents
are reviewed and gathered onsite and
key personnel interviews are conducted.
Emails may be requested from key
personnel for a specific period of time in
an electronically searchable format.
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Compliance with SEC registration requirements: An implementation playbook

Post-registration compliance activities

Once registered, continual compliance
should be handled on a regular basis.
Reviews of electronic communications
should take place daily, while employee
trading accounts should be reviewed
monthly. Annually, your firm should
hold a compliance review meeting,
provide updates on firm information
(Form ADV) and review internal policies
and procedures. Tasks that should be
handled as required include:
• know your customer (KYC) and new
client on-boarding;
• changes to fees and service charges;
• continuing education;
• customer complaints;
• books and records;
• gifts and gratuities;
• outside accounts, outside business
activities, private securities
transactions approval; and
• marketing publications approval.

Annually, your firm should hold a compliance review meeting, provide updates
on firm information (Form ADV) and review internal policies and procedures.

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Compliance with SEC registration requirements: An implementation playbook
Why Grant Thornton?
Our Financial Services practice has
more than 40 years of experience serving
hedge funds, private equity firms and
investment advisers. Our Financial
Services professionals will bring the skills
your firm needs to navigate the SEC
registration process and other key issues:
• Compliance and regulation –
Comprehensive understanding of the
legal and technological ramifications
of recent regulatory reforms on a
global level
• In-house experience – Risk
management, connectivity,
operations, data integration and
analytics
• Product and geographic breadth –
Scalable and transparent offerings
across a global footprint
Please note: The availability of these services is subject to evaluation for independence.
As industry thought leaders, we
regularly publish white papers, articles
and other communications designed to
keep clients abreast of emerging issues.
We provide timely, insightful guidance
on industry-related policies and positions
issued by agencies and organizations such
as the Financial Accounting Standards
Board, the SEC, the Financial Services
Authority, the CFA Institute and the
American Institute of Certified Public
Accountants. We also leverage our
strong professional relationships with
regulatory agencies in Washington, D.C.,
and abroad to help our clients remain
compliant with federal and overseas
legislation and enforcement activities.
For more information
To learn more about our practice, visit
www.GrantThornton.com/
financialservices or contact:
Steven Goldberg
Principal
Financial Services Advisory Services
T 212.624.5440
E steven.goldberg@us.gt.com
Winston Wilson
National Asset Management
Industry Leader
T 212.624.5363
E winston.wilson@us.gt.com
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