In testimony to the House of Representatives Committee on Financial Services on March 20 outlining the Securities and Exchange Commission’s overall enforcement program, goals and needs, Commissioner Elisse B. Walter discussed the current focus of the SEC enforcement division in respect of hedge funds. The SEC has formed a Hedge Funds Working Group within the Enforcement Division to address hedge fund related investigations. She said that in respect of hedge funds, the SEC’s current enforcement focus includes potential manipulation, abusive short selling and collusion, valuations of illiquid assets, and whether advisors of fund-of-funds and “feeder funds” (i.e., conduits for investment into unaffiliated underlying funds) have exercised requisite due diligence on the underlying funds. She also testified that “[t]he huge number of liquidations and suspensions of redemptions by hedge funds in the past year have created particular concern as to whether hedge fund advisors may be favoring their own interests above others and whether principals, employees or favored investors of the hedge fund advisor may have received ‘preferential redemptions’ from the fund at issue.”
Commissioner Walter also discussed other SEC enforcement activity that may also affect hedge funds, such as investigation of alleged circulation of false rumors and manipulation, and inadequate or fraudulent disclosure of issues relating to subprime mortgage securities. The Enforcement Division’s recently created Rumors and Market Manipulation Working Group has been investigating, in parallel with NYSE and FINRA, market data obtained from numerous hedge funds, broker-dealers and institutional investors under oath to determine, among other things, if credit defualt swaps were used to manipulate equities prices of six large financial issuers in the recent market turbulence.