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SEC to Focus on Four Key Hedge Fund Issues in 2013

The “retailization” of hedge funds has made it easier for unsophisticated investors to invest directly in the products and, in turn, could open the door to potential abuse and fraud. To address this new reality, the Securities and Exchange Commission (SEC) is ramping up its efforts to oversee the compliance side of hedge funds in 2013.

Speaking at a Regulatory Compliance Association’s conference in New York last month, Bruce Karpati, head of the SEC’s Asset Management Unit, told audience members that the SEC has brought more than 100 enforcement actions against hedge funds since 2010 and views this area of enforcement as one of the agency’s top priorities this year.

As reported in an article by AdvisorOne, Karpati stated that the Asset Management Unit is particularly concerned about four emerging developments in the hedge fund industry. They are:

  • Alternative investment vehicles and the fact that their lack of transparency creates the potential for fraud, especially among unsophisticated investors;
  • The elimination of a rule prohibiting general solicitation and general advertising as a result of the JOBS Act. Now what were formerly private offerings can in some form be broadcast to a much wider audience.
  • The emerging retail orientation of hedge funds, which increasingly exposes ordinary investors to such funds either directly or indirectly through pensions, endowments,foundations, and other retirement plans; and
  • The growing risks posed by private funds advised by unregistered advisors.

“Unregistered advisors may not have effective compliance policies and procedures to prevent fraud and other violations, are not subject to inspection by exam staff, and need not comply with the Commission’s advertising rules applicable to registered advisers,” Karpati said.

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