For newly registered hedge fund managers, one of the many newfound challenges of registered status is the obligation to conduct an annual compliance review.  This obligation is imposed by Rule 206(4)-7 under the Investment Advisers Act of 1940 (Advisers Act).  But neither Rule 206(4)-7 nor any other statute, rule or SEC pronouncement provides clear and authoritative guidance to hedge fund managers on how to prepare for, conduct and document the annual compliance review.  In the absence of such guidance, hedge fund managers typically seek to follow custom and practice in the market.  But custom and practice can be infamously difficult to discern with accuracy.  This article aims to alleviate that difficulty by detailing the mechanics of best practices for annual compliance reviews.  Specifically, this article is the second in a two-part series discussing, step by step, why and how hedge fund managers should approach, execute and follow up on the annual compliance review.  The first article discussed: what the annual compliance review is; enforcement actions demonstrating the imperative of a thorough annual compliance review; how to prepare for the annual compliance review, including a discussion of information gathering and the various types of testing that should be performed prior to the review; and who should conduct the annual compliance review.  See “How Hedge Fund Managers Should Approach Preparing For, Conducting and Documenting the Annual Compliance Review (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 12 (Mar. 22, 2012).  This article discusses: when the annual compliance review should be conducted; the annual compliance review process itself, including how a hedge fund manager can define the scope of the review, appropriately review its policies and procedures, conduct a risk assessment for changed circumstances, identify compliance weaknesses and take appropriate remedial actions; how to document the annual compliance review; the biggest challenges in conducting the review; and common mistakes made by hedge fund managers in conducting the review.