The SEC will be sharpening its monitoring of hedge funds wishing to get into the retail mutual fund space.
Bruce Karpati, Enforcement Division asset management unit chief, says that easier access to hedge funds has resulted in direct investment by unsophisticated retail investors.
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The implementation of the JOBS (Jumpstart Our Business Startups) Act provision that eliminates the ban on general advertising and solicitation by hedge funds opens the door to wider abuse and fraud opportunities.
The SEC will be looking to make sure hedge funds have appropriate checks and balances in place to guard against conflicts of interest such as a portfolio manager valuing the fund’s assets.
Funds operating as fiduciaries under the Investment Advisors Act of 1940 must also guard against both conscious and unconscious incentives that could result in offering somewhat biased advice, even if it is offered unwittingly.
Hedge funds can likely expect to be examined more frequently and firms should be ready to implement corrective steps if the SEC finds violations. This will reduce more formal inquiries into fund operations.
Advisors to clients looking to invest in hedge funds can use this short SEC due diligence list
to educate clients on hedge fund risks and what to look for when considering a hedge fund of funds or private hedge fund manager.