Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal’s Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.

Walter noted that already during exams, SEC staff has seen some advisers erroneously calculating fees they are to receive, getting fees they aren’t entitled to from portfolio companies, inappropriately covering their expenses using fund assets, and engaging in other questionable behavior. She cautioned that advisers should take a close look at their expense tables and income, while ensuring that their business practices are in line with the representations they’ve made and their commitments to clients.

However, the SEC commissioner also reported that staff have seen a lot of new registrants, mature businesses in particular, that have set up good risk management and control programs and compliance. She also said that it was too early to reach more conclusions based on this nascent exam program. Walter did, though, make it clear that not only does the Commission take advisers’ fiduciary duty to clients “very seriously,” but also, she noted, staff examiners will “follow the money.”

Regarding the rulemaking that occurred to establish an SEC whistleblower bounty program, she pointed out related two issues that “bothered” her: that a culpable whistleblower who was not criminally convicted might be entitled to an award for stepping forward and she worries about how the program may be impacting internal corporate compliance processes. Walter says that staff will monitor both issues over the next couple of years.

To speak with a private fund adviser fraud lawyer, contact our securities fraud law firm today. Your first consultation with Shepherd Smith Edwards and Kantas, LTD, LLP is free.

What SEC Registration Means for Hedge Fund Advisers, SEC, May 11, 2012

Claim and Award, SEC Office of the Whistleblower

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Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses, Stockbroker Fraud Blog, November 8, 2012

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio, Institutional Investor Securities Blog, May 10, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011