SEC enforcement activity with respect to hedge funds increased significantly in 2005 and is almost certain to increase again in 2006. The outcome of an SEC investigation may involve disgorgement of profits, civil monetary penalties, suspensions or bars from the securities industry, or even criminal prosecution. In the best interest of the fund and its managers, an appropriate pro-active response to an SEC inquiry is often the best way to react to a call from the Enforcement Division. This article addresses the first steps to take, "when the sheriff comes calling."
First, contact experienced counsel. SEC Enforcement contacts are not random. The initial response can be very important. Experienced counsel can help management evaluate the scope and magnitude of the SEC Staff’s concern and begin to formulate an appropriate response. Experienced counsel will also help set the appropriate tone from the beginning....
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