SEC Eyes Quants, Preferential Redemptions, Valuation For Enforcement

Oct 4 2011 | 2:41am ET

The Securities and Exchange Commission's hedge fund enforcement group has its eyes set squarely on quantitative managers, its co-head said.

Bruce Karpati told a Practising Law Institute panel in New York yesterday that his group is "very much focused" on quantitative hedge funds and algorithmic traders, Bloomberg News reports. The agency is focusing on "aberrational performance" by such funds and is likely to bring more cases against them in the future, he said, primarily in the form of administrative proceedings rather than civil lawsuits.

Karpati did not elaborate on precisely which practices the SEC hoped to crack down on in terms of quants, but he did say his group is also looking closely at possible cases concerning preferential redemptions, valuation of illiquid assets and use of side pockets. He also said that the SEC would cast a wider net, bringing cases against individuals who are negligently responsible for illicit activity in addition to those directly responsible for such activity.

Much of the new attention and push for more action is the result of the Dodd-Frank financial regulation law, which grants the SEC wider powers and allows it to hold administrative hearings, where the rules favor the regulator, rather than force it to sue those accused of wrongdoing.

"This is really the result of getting enhanced authority to pursue wrongdoing," he told the PLI panel.


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