Administration December 9, 2002

SEC Wrapping Up Hedge Fund Probe

September 12, 2002 (PLANSPONSOR.com) - US Securities and Exchange Commission (SEC) investigators are moving full speed ahead in their probe of hedge fund fraud, the spread of hedge fund to individual investors and hedge fund sales by mutual fund companies.
Reported by

Quoting lawyers following the investigation, the Financial Times said the SEC inquiry could be wrapped up by the November Congressional elections.

Paul Roye, head of the SEC’s investment management division, said the probe would be completed by the end of the year, according to the Financial Times report.

The story said SEC investigators sent letters and paid visits to hedge funds that are also registered investment advisors. The investigators also sent letters and paid visits to Wall Street prime brokers servicing hedge funds.

The Financial Times story said the prime brokers are thought to have the most centralized hedge fund data of anyone in the business.

Finally, the SEC issued subpoenas to the hedge funds not investment advisors. The industry is split roughly equally between registered and non-registered hedge funds. The SEC does not have the authority to demand information from unregistered hedge funds without using subpoena power.

Three Themes

According to the Financial Times report, the four-month old probe is moving along three routes:

  • the recent increase in hedge fund fraud
  • the spread of hedge fund products to retail investors
  • the proliferation of hedge funds within mutual fund complexes.

The initial letter sent out to hedge funds at the end of June, and obtained by the Financial Times, suggested the SEC’s initial intention was to gather as much information about the industry as possible.

Among other things, the SEC asked about the background of hedge fund staff, how hedge funds valued their portfolios, and what commissions hedge funds paid to Wall Street.

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