The appropriate allocation of expenses between a fund manager and its clients continues to be a keen area of interest during SEC exams, evidenced by the fact that the SEC continues to bring enforcement actions against fund managers alleging failures to properly allocate expenses. See “SEC Settlement Reminds Fund Managers to Strictly Adhere to Disclosed Fee and Expense Calculation Methodologies and Fully Disclose Conflicts of Interest” (Nov. 16, 2017). The SEC’s Office of Compliance Inspections and Examinations recently provided some insight on this topic in a Risk Alert discussing the six most frequent fee- and expense-related issues identified in deficiency letters from more than 1,500 adviser examinations completed in the last two years. See “OCIE Risk Alert Warns of Six Most Frequent Fee and Expense Compliance Issues” (May 3, 2018). Thus, the SEC appears poised to continue to critically examine this issue. This two-part series discusses best practices for fund managers when approaching the allocation of expenses. The first article discusses the key issues and challenges inherent in allocation decisions, and outlines various regulatory and other concerns posed by allocation practices. The second article provides an overview of approaches used by hedge fund managers in allocating expenses; describes challenges associated with disclosure of expense allocation practices; highlights approaches for addressing the allocation of expenses when disclosures are silent with respect to specific expenses; and discusses key controls designed to ensure that expenses are being allocated in accordance with the manager’s policies and procedures. For more on fee and expense allocation practices, see our three-part series: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016).