The SEC’s Asset Management Unit

The SEC’s Asset Management Unit

Yesterday, Bruce Carton of Securities Docket hosted a webinar: The 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 enforcement matters.

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 institutional investors.

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 problems.

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.

Bondi laid 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 this presentation.)


For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.

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