The Securities and Exchange Commission has found that alternative investment funds are using phony service providers to boost their fees, Chairman Mary Jo White told a congressional committee yesterday.
White said that about 1,800 hedge and private equity funds have registered with the Securities and Exchange Commission. The regulator has found the bogus service providers and other issues, including improper assignments of some fees and expenses to companies owned by p.e. funds, during its reviews of the newly-registered companies.
The SEC chair said that more than half of the 400 p.e. firms that have been inspected were found to have inflated fees and expenses charged to companies they own. She said the findings were evidence that the SEC needs an increase in its $1.7 billion budget.
“The funding we are seeking is fully justified by our existing and growing responsibilities to investors, companies and the markets,” she said.
White also addressed the growing furor around high-frequency trading following the publication of author Michael Lewis’ new book, Flash Boys. Lewis argues that the practice amounts to front-running and has “rigged” U.S. markets.
White said that the SEC is looking closely at HFT but rejected Lewis’ allegations. HFT “is not unlawful insider trading,” and critics are confusing the difference between early access to information and the ability to “more quickly react” to it.