(Hedge Fund LCD) By all accounts—press releases issued by the Securities and Exchange Commission, speeches given by its commissioners and various department heads, along with the agency’s most recent performance reports—registered investment advisers are in the SEC’s examination crosshairs. The latest examination statistics underscore the point. In fiscal year 2015 alone, the Office of Compliance Inspections and Examinations conducted almost 2,000 formal examinations of registered entities, including investment advisers. And roughly 35% of registered private fund managers were examined last year, resulting in more than 800 enforcement actions and $4.2 billion in penalties and disgorgement.

The current evidence is a harbinger of more to come: The SEC will, at some point soon, examine every registered investment adviser. Tellingly, the regulator estimates that a deficiency letter accompanies more than 90% of all examinations. Examiners are looking for (and will find) risks in nearly every compliance program. Hedge fund managers should anticipate not only an examination, but a deficiency letter, detailing lapses and requiring corrective action, following the exam.

And yet however ubiquitous, deficiency letters are not without their impact. Increasingly, investors are requesting review of deficiency letters, and anything included in them can be construed as a reason to invest elsewhere. Mitigating the scope of a potential deficiency letter is business-critical.

In this regard, the best defense against the potential repercussions of an SEC examination and deficiency letter can be a good offense. The exit interview, conducted after examination but prior to issuance of a deficiency letter, provides a ready opportunity to proactively address and even resolve issues uncovered during an examination and mitigate the impact and scope of a deficiency letter. This article outlines how to effectively manage the exit interview process in order to minimize the impact of an SEC deficiency letter.

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