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SEC Actions Point to a Closer Look at Hedge Funds


4/21/14

Synopsis
 
The U.S. Securities and Exchange Commission (SEC) has asked Congress for additional resources for private equity and hedge fund inspections. This request may translate into an increased focus on hedge fund compliance and operating activity. CohnReznick anticipates that additional funding may result in a closer focus on how private equity and hedge funds value their assets, disclose their fees, and communicate with investors in an effort to provide more transparency and better protect investors.
 
Issue
 
In its fiscal 2015 budget request, the SEC is seeking to add 316 staff to its examination program in the Office of Compliance Inspections and Examinations. It currently has about 450 examiners, accountants, and lawyers in 12 offices focusing on investment advisers and companies. In a statement to the U.S. House of Representatives appropriation panel, SEC Chair Mary Jo White said that the regulator examined only about 9% of registered investment fund advisers in the last fiscal year.
 
While the SEC regularly examines a wide range of financial institutions, including brokerages and clearing houses, to ensure compliance with federal securities laws, regulator exams have been criticized for missing major violations. Although the SEC already has examiners who specialize in funds, historically, the agency has focused on public asset managers such as mutual funds that have been highly regulated since 1940.  However, many hedge funds and private equity firms hold complex and illiquid investments that are harder to value than those at traditional asset management firms, and such funds can have complex fee structures that are harder for investors to understand. A top priority of the SEC is to ensure transparency in these funds.
 
Aligning with the effort to better protect investors and maintain fair markets, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its list of Examination Priorities for 2014 earlier this year. The letter includes six general market-wide priorities which include:

  • Fraud Detection and Prevention
  • Corporate Governance, Conflicts of Interest and Enterprise Risk Management
  • Technology
  • Dual Registrants
  • New Laws and Regulation
  • Retirement Vehicles and Rollovers
     

As part of the priorities that span the entire market, the SEC will evaluate whether firms registered as broker-dealers and investment advisers create a risk that places customers in inappropriate account types that result in revenue for the firm, but not necessarily the customer. The letter also lists more specific 2014 exam priorities for broker-dealers, including sales practices and trading issues, as well as for investment advisers, including unexamined advisers and wrap fee programs. Click here to read the complete letter.
 
What Does CohnReznick Think?

As an industry, we continue to see growing regulation and increased focus by regulators on private equity and hedge fund managers. Compliance manuals, valuation policies and procedures, and the internal controls over these areas are becoming more important and should be reviewed on an ongoing basis. These procedures will also be advantageous as potential investors perform their due diligence prior to making fund investments.

Contact

For more information, please contact Jay Levy, Partner and Financial Services Industry Practice Leader, at 646-254-7412.
 
To learn more about CohnReznick’s Financial Services Industry Practice, please visit our website.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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