SEC Sees Deficiencies In Hedge-Fund Exams

Sep 23 2014 | 7:25am ET

Hedge funds aren’t doing especially well on their first Securities and Exchange Commission exams.

The agency has completed about 185 examinations of the hedge funds that have registered with it since that was mandated by the Dodd-Frank financial-regulation overhaul. And it has found a range of deficiencies, Andrew Bowden, the head of its Office of Compliance Inspections and Examinations, said.

Speaking at a Philadelphia conference, Bowden said the SEC was finding widespread problems ranging from performance reports to valuation to fees charges to investors.

“One of the most common findings we have are that the valuation and policies and procedures aren’t highly evolved and aren’t very specific,” he said. “We’ll see people from quarter to quarter or year to year changing their valuation methodology and managing to pick the one that leads to the highest valuation in their fund.” That, of course, also leads to the highest fees.

Bowden also said that the hedge funds examined have been slippery about describing past performance.

“You can’t cherry-pick your past specific recommendations because there is an opportunity for you, if it’s in your sales and marketing, to pick the biggest winners you ever had,” Bowden said. “We’ve seen people passing off past specific recommendations that they never made.”

Bowden did say that some of the most egregious conduct was isolated and also praised the compliance programs at many larger hedge funds as “pretty highly evolved.” But he would not describe the problems in detail or say whether any had been referred to the regulator’s enforcement division.

Bowden’s comments echo those he made in May about private-equity firms, although hedge funds appear to be doing better than their p.e. colleagues. Bowden said more than half of p.e. firms had “violations of law or material weaknesses in controls.”


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