Not to be outdone by FINRA (see article above), the SEC often uses the first of the year to announce its priorities for examinations to be conducted within the investment management sector for the upcoming year. In a recent presentation by Bruce Karpati, Chief of the SEC’s Enforcement Division’s Asset Management Unit (AMU), the following represent the priority areas for AMU’s enforcement and inspection agenda for 2013.
The AMU’s primary focus is on hedge funds and investment advisers to such funds and other alternative investments and private funds. In order to more effectively conduct examinations of such funds and their advisers, the AMU has recently hired professionals from the hedge fund and alternative investment industry to help conduct the exams. According to Mr. Karpati, “They know where the bodies are buried.”
During the past three years, the SEC has initiated more than 100 enforcement actions against hedge fund managers. With the AMU’s newly acquired expertise in the operations of such funds and their management, the number of enforcement actions is likely to increase in 2013. The main type of violations cited within these actions involved conflicts of interest, valuation, performance, and compliance and controls.
According to Mr. Karpati, the AMU will focus more closely on private equity fund advisers that are at higher risk for fraudulent behavior (based on performance data of hedge fund advisers that raises unusual or extraordinary results). In addition, it appears that the AMU will focus on those private fund advisers who have less than $150 million in assets under management and are not otherwise required to be registered as investment advisers under the Investment Advisers Act of 1940.
Mr. Karpati recommended certain steps that hedge fund and other private fund managers could take to ensure that they fulfill their fiduciary duties and avoid SEC enforcement actions. He reminds managers that they need to have a culture of compliance throughout their operations and employees, coupled by effective and written policies and procedures. He also stresses the need to provide compliance personnel adequate authority, management support, and time to do an effective job. Finally, such managers need to prepare for the inevitable AMU examination.