According to a Reuters report, the U.S. Securities and Exchange Commission (“SEC”) has recently formed a group (the “Group”) dedicated to examine private equity funds and hedge funds. The Group will focus on how these entities value their assets, disclose their fees, and communicate with investors.
Even though since the 1940’s SEC’s examiners have already examined funds, their failure to discover the Bernard Madoff Ponzi scheme and the complexity and illiquidity of the fund’s investments have led the SEC to push Congress to increase its annual budget in order to add more specialist examiners to help handle the changing financial landscape.
This group is formed pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank”) which, among other requirements, require funds with more than USD 150 million in assets, under their management to register and to be examined and regulated by the SEC.
Hedge funds and private equity firms tend to invest and hold complex and illiquid assets, which makes their assets’ value difficult to assess. This difficulty has spurred the need for the SEC to appoint special examiners for this job. Another complexity that raises the need to appoint the Group is the tendency to have complex fee structures, which can be hard for investors to understand.
The SEC has also asked Congress for an increase of its budget designated to examine these funds. According to the Economic Times, Mary Jo White, chairwoman of the SEC, told a US House of Representatives appropriations panel that “the regulator examined only about 9 per cent of registered investment fund advisers in the last fiscal year.”
In prepared testimony to the Committee on April 1, 2014, White said that “There is an immediate and pressing need for significant additional resources to permit the SEC to increase its examination coverage of registered investment advisers so as to better protect investors and our markets,”
Regulatory experts seem to be optimistic with respect to the Group’s capability to examine and regulate the funds.