SEC Looks at Hedge Funds, Amex Irregularities

Seeking to better understand how hedge funds are managed and how their assets are valued, the Securities and Exchange Commission will consider a staff proposal to put hedge funds under its oversight umbrella.

“Hedge funds for the most part operate below the commission’s radar screen,” SEC Chairman William Donaldson said at a press conference in Washington, at which the SEC staff proposal was unveiled. “The commission needs to have a means of examining hedge fund advisers and monitoring their operations.”

The staff proposal would require all hedge fund managers to register with the SEC, a requirement all mutual fund managers already follow. The proposal, which would not require registration of the funds themselves, requires the approval of the five-member commission.

Hedge funds, the wealthy investor’s option since participants must have $1 million in net worth, are investments that use leveraged or borrowed funds to speculate on changes in securities. There are now more than 6,000 hedge funds, up from 2,500 just five years ago and there is more than $600 billion invested in the funds, as compared to $50 billion in 1990. The staff recommendation includes increasing the investment threshold to $1.5 million in net worth.

One of the primary concerns outlined by the SEC staff is the lack of rules to govern how hedge fund assets are valued. “We identified an information gap,” said Paul Roye, director of the SEC Investment Management division. “We think the specter of SEC examination will lead to a culture of compliance in these organizations.”

Hedge fund Canary Capital Partners LLC paid $40 million this month to settle charges brought by New York Attorney General Eliot Spitzer who accused Canary of “illegal trading” of mutual funds.

In its report, the SEC staff said it was “concerned that the commission’s inability to examine hedge fund advisers makes it difficult to uncover fraud and other misconduct.”

The SEC also unveiled violations at the American Stock Exchange (Amex), which is accused of failing to supervise options trading and then lying to regulators who were checking on whether their orders had been followed.

The nation’s third largest stock exchange is under the SEC’s microscope with Amex staff who coordinate stock and option trading accused of ignored orders from professional day traders, according to Bloomberg News. In some cases, day traders were given prices that were worse than advertised.

“There’s increasing skepticism that the industry is able to regulate itself,” Alan Bromberg, a law professor at Southern Methodist University in Dallas, told Bloomberg News. “Pressure is building for change in the way the markets function and who regulates them.”


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