The SEC is examining whether principals, employees or favored investors of certain hedge funds may have received preferential treatment in the wave of recent liquidations and redemptions, said Commissioner Elisse Walter on March 20 in prepared testimony to the House Financial Services Committee. The SEC Division of Enforcement has formed a Hedge Fund Working Group (the "Working Group") that will address this and other issues arising in investigations relating to hedge funds, said Walter.
Other issues to be addressed by the Working Group include whether funds of funds and feeder funds that placed investor funds with some of the recently uncovered fraudulent schemes failed to exercise the due diligence and compliance oversight they touted to investors. The Working Group will also focus on market manipulation, valuation of illiquid assets, and insider trading concerns.
The SEC has used its anti-fraud authority under the federal securities laws to bring over 100 cases involving hedge funds in the last five years, against both registered and unregistered advisers, noted Walter in her testimony.
In addition, in written testimony to the Senate Banking Committee on March 26, SEC Commissioner Mary Schapiro announced that, in an effort to strengthen investor protection, she had asked the SEC staff to prepare a series of proposals relating to client asset protection. These proposals are expected to include requirements that investment advisers with custody of client assets undergo an unannounced annual third-party audit to confirm the safekeeping of those assets, and that broker-dealers and investment advisers with custody of investor funds nominate and publicly list a senior compliance officer and undergo third-party compliance audits to confirm their compliance with the law.
WALTER TESTIMONY: available here (HTML)
SCHAPIRO TESTIMONY: available here (PDF)