By Simon Riveles and Simon Cooke
According to a report by Reuters, the U.S. Securities and Exchange Commission (“SEC”) has formed a group dedicated to examine private equity funds and hedge funds (the “Group”). The Group will focus on how these funds value their assets, disclose their fees and communicate with investors.
The Group is co-chaired by Igor Rozenblit and Marc Wyatt. Mr. Rozenblit, both investment management industry veterans. The creation of the Group is a further example of the increased regulatory oversight of the financial services industry following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). Broadly, Dodd-Frank requires investment advisers to hedge or private equity funds with over $150 million in assets under management to register with the SEC. At the SEC’s 2014 Compliance Outreach Program, the SEC identified several areas of particular concern with private funds, including vague limited partnership agreements, insufficient disclosure practices, shifting of fees and expenses, as well as unclear performance and valuation metrics.
The SEC already has examiners who specialize in funds, but historically the focus of the SEC has been on registered retail asset managers such as mutual funds who have been highly regulated since the 1940’s. The criticism of the SEC for failing to unearth the Bernard Madoff Ponzi scheme as well as the fact that private funds have complex and illiquid investments more difficult to value than investments at traditional asset managers, has led to the SEC adding more specialist examiners better equipped to handle the changing financial landscape.
The creation of the Group is part of the SEC’s wider effort to bring a more specialized focus to high risk areas of the market. In the last year, the SEC has formed three other niche industry groups: the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the Center for Risk and Quantitative Analytics. The SEC has also asked Congress for more resources for fund inspections. 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, where the Group is based. The SEC currently has approximately 450 examiners, accountants, and lawyers in 12 offices focusing on investment advisers and companies.
Initially, the Group will be comprise existing staff in four of the SEC’s regional offices that will work part-time with Mr. Rozenblit and Mr. Wyatt on fund examinations. If successful, the SEC plans to expand the Group over the course of the next six to twelve months to more regional offices. Commentators have noted that Mr. Rozenblit and Mr. Wyatt bring much needed expertise to the SEC’s examination of private funds. Whatever the outcome of the Group, it is clear that private fund regulation is clearly on the SEC’s radar.
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