Should the SEC devote more resources to supervising the activities of hedge funds in which sophisticated investors invest, or should it devote more resources to investment advisor fraud, where the victims are less able to fight back against wrongdoers? What is the correct balance for the SEC’s use of its precious resources?
This very question was raised last week in a letter to SEC Chair Mary Jo White by Congressmen Jeb Hensarling (R-Tex) and Scott Garrett (R-NJ), acting respectively as Chairman of the House Committee on Financial Services and Chairman of the Subcommittee on Capital Markets and Government Sponsors Enterprises.
The primary focus of the Congressmen’s letter was Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act I (PL-111-203), which mandates that all advisers to private equity funds with assets over $150 million register and subject themselves to oversight by the SEC. The letter expressed concern about whether there was enough “systematic risk” involving private equity fund advisors to justify the kind of SEC scrutiny that was going to be devoted to private equity funds. The Congressmen’s question was: given the limited resources available to the SEC, was it the best use of the SEC’s resources to scrutinize private equity funds with assets over $150 million? Additionally, the Congressmen pointed out that eligible investors in private equity funds must be accredited investors, with annual income of at least $200,000 or a net worth above $1 million. They asked whether the SEC should devote more resources to protect poorer, less sophisticated investors, rather than on investors with sufficient resources to rectify any wrongdoing that may have been visited upon them. The letter also asked that Chair Mary Jo White respond by September 20, 2013.
The Congressmen’s letter raises very interesting management and public policy issues. A review of the SEC’s website shows a large number of cases that relate to investor advisor fraud directed at small, unsophisticated investors. Conversely, the number of private equity fund fraud cases involving sophisticated investors has been relatively small. Thus, the Congressmen’s letter raises an issue of whether the SEC has found the right balance in the way it currently devotes its resources to investigating wrongdoing directed at sophisticated investors versus unsophisticated investors.
It will be interesting to see how Chair White responds to the Congressmen’s letter. In the meantime, the issues raised by the letter provide food for thought.