Yesterday, Bruce Carton of Securities Docket hosted a
SEC's Asset Management Unit and Strategies for Avoiding Trouble in 2011 and
Beyond. He managed to get Bruce Karpati, the co-head of the SEC's Asset
Management unit, to participate. Also joining the presentation were John
Reed Stark, Managing Director of Stroz Friedberg and former Chief, SEC
Office of Internet Enforcement; and Bradley J.
Bondi, a litigation partner at Cadwalader, Wickersham & Taft LLP and
former counsel to SEC Commissioners Troy Paredes and Paul Atkins for
The SEC's Asset Management Unit focuses on investment
advisers and investment companies. If you run a private fund, this unit is
keeping an eye on you.
You can see replay of the presentation yourself, but here
are the things that caught my attention:
Private fund registration under Dodd-Frank is very
important to his unit. They work closely with OCIE. They are looking forward to
the new data that will come from fund registration and Form PF.
They are especially concerned about the level of
transparency, even for private funds, and the information given even to
Weak and fraudulent valuation processes are high on his
list of concerns. In particular, he is concerned about private funds with an
incentive to overvalue assets. He mentioned the Palisades funds use of side
pockets that lead to an enforcement action. He also mentioned the
Another highlight was "investment drift." Make sure that
your investment activity is not wandering from the areas that you told your
investors you were going.
Of course, insider trading and expert networks are taking
up a fair amount of his unit's time and energy.
He raised the "suspicious performance investigation"
where the SEC is looking at funds that have consistently outperformed market.
The leading example is the Madoff scandal. Madoff's outlying performance should
have been a red flag for investors. The SEC wants to spot these kind of
He is looking at adviser background misrepresentation. It
sounds like they are ready to bring fraud charges for misstating educational
background and experience.
Stark praised the unit. As a lawyer who would be on the
opposite side of the table he would prefer someone with specialized knowledge
of the investment management industry than a generalist enforcement lawyer.
Stark focused on the In the Matter of AXA
Rosenberg Group LLC, et al.(Feb.2011) involving a flaw in the computer
model for a quantitative fund. The model's algorithm had a flaw that resulted
in under-performance. This is tough one for compliance because the compliance
geeks are rarely in the room with the math geeks.
out a series of compliance policies and issues that new investment adviser
registrants should be concerned about. He spent a great deal of time
focusing on privacy and security breaches. (Maybe too much for the focus of
For additional commentary on developments in
compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.
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