SEC Grills Asset Managers

The Securities and Exchange Commission's asset management unit has a watchful eye on newly registered investment advisers, including hedge fund and private equity firms.

(October 12, 2012) — The US Securities and Exchange Commission (SEC) has introduced a compliance exam for newly registered managers, spurred by changes enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Under the SEC’s new campaign, the National Exam Program (NEP) would make private investment advisers, including hedge fund and private equity firms, no longer exempt from registering with the agency.

The exam would scrutinize the following “higher-risk areas of the business,” according to the SEC.

1) Marketing: “Investment advisers may utilize marketing materials to solicit new investors or retain existing investors,” the SEC noted. “NEP staff will review marketing materials to evaluate whether the investment adviser has made false or misleading statements about its business or performance record; made any untrue statement of a material fact; omitted material facts; made any statement that is otherwise misleading; or engaged in any manipulative, fraudulent, or deceptive activities.” The SEC added that it would review how investment advisers solicit investors for the private funds they manage, including the use of placement agents.

2) Portfolio Management: NEP staff will review and evaluate investment advisers’ portfolio decision-making practices, including the allocation of investment opportunities and whether advisers’ practices are consistent with disclosures provided to investors.

3) Conflicts of Interest: “Some areas of the conflicts of interest that NEP staff will review includes: allocation of investments, fees, and expenses; sources of revenue; payments made by private funds to advisers and related persons; employees’ outside business activities and personal securities trading; and transactions by advisers with affiliated parties.”

The recommendations were outlined in a letter sent Tuesday, October 9, to thousands of the newly covered advisers from Drew Bowden, acting national associate director of the SEC’s examination and inspection program.

The regulator added that it would conduct meetings and seminars with the money management firms’ chief compliance officers.

“Managers should take every possible step to make sure they’re in full compliance,” Joseph Nodarse, head of institutional marketing at SEC-registered Tradex Global Advisors, told aiCIO in response to the new “presence exam” campaign for private investment advisers. “And they should hire a top-notch attorney to avoid mistakes–it’s so critical to make sure you do everything possible when you start a new fund. It’s so competitive.”

“Clearly,” he added, “regulation is part of our industry–sometimes it’s good, sometimes it’s overdone. But with institutions, it’s needed when it comes with a fund or product. After all, institutional investors wear their fiduciary responsibility hat everyday.”