Even though it has been several months since the “hedge fund registration” rule was adopted, the SEC remains under pressure to justify the reasons for the adoption of the rule. The source of this pressure is hedge fund adviser Phillip Goldstein, who has filed a lawsuit challenging the SEC’s authority and justifications for adopting the rule. In its response brief, the SEC continues to assert that the rule was necessary due to the “increase in fraud involving hedge fund advisers,” including the infamous mutual fund market timing/late trading scandal. (The SEC’s brief fails to explain why its staff, who examined dozens of hedge funds during its fact-finding examination sweep, failed to take any action against hedge fund advisers that followed mutual fund market timing strategies before Mr. Spitzer found the practice unlawful). Most industry experts agree that there has been no increase in hedge fund fraud. Rather, most believe that the SEC has classified garden variety fraud cases as “hedge fund” cases. Given the pressure to justify the rule, newly registered hedge fund advisers should expect their advisory activities to be under significant scrutiny during SEC examinations. Areas of particular concern to hedge fund advisers include: Trade allocations–advisers need to have specific procedures for allocating block trades to hedge funds and separate accounts. Such procedures should provide for fair and equitable treatment of all clients. Valuation procedures–adequate procedures for fair valuation of securities are particularly important for hedge fund advisers because they usually receive performance fees based on the increase in the value of the fund’s securities. Risk management–advisers should have procedures for assessing investment and operational risk. SEC examiners are routinely requesting a written summary on advisers’ risk assessment policies, risk committee meeting minutes, and “inventory of risks.” Insider trading–hedge fund advisers are more likely to be privy to non-public information than other advisers. Therefore, they need to be especially vigilant of trading, both personal and for clients, based on non-public information. Compliance culture–hedge fund advisory firms are often owned and headed by individuals with dynamic personalities. Such firms need to make sure that the CCO has sufficient authority to implement and enforce adequate compliance policies and procedures.