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2015 Hedge Fund Trends & SEC Exam Priorities (Webinar Recap)

By Anna Wendt | Thursday, February 5th, 2015

With a new year comes new regulations for hedge funds and investment firms. Earlier this week, Eze Castle Integration hosted a webinar during which Ricardo Davidovich, partner at Haynes & Boone LLP, shared his insight into the Securities and Exchange Commission’s (SEC) new examination priorities as well as reoccurring themes firms should expect to see play out through the year.

What’s New in 2015

Retail Investors

One priority for examinations this year is the focus on retail investors. Davidovich says that “hedge funds, which in [the SEC’s] mind have historically been an exclusive and private club, are being sold to the retail and consumer client base.” Meaning they will be taking a closer look at the types of fees being sold, the sales practices and the suitability analysis. Firms should focus on making sure no information released is misleading and that there are provisions against fraud. There should be a real emphasis on policies to create guidelines that can be shown and proven to the SEC.

Market Wide Risks

With this priority, the SEC is focusing on keeping the markets fair and orderly. They want to protect investors, especially ones who invest in large firms with many affiliates. This is also where the focus on cybersecurity comes in. With many businesses suffering cybersecurity attacks in 2014, it makes sense that the SEC will focus on this aspect of the market. Having robust security and infrastructure policies and systems in place will help to strengthen the market and decrease risk across the board.

Annual SEC Focuses

Marketing/Performance Advertising

This is a strong point of contention with investment advisors and fund managers. As one of the most regulated areas by the SEC, funds partaking in advice marketing and advertising must employ strict policies and procedures to demonstrate to the SEC that they are in compliance. Proving that your firm has a “culture of compliance” is the most effective way to keep the SEC’s attention away from you.  

Any time a fund is actively promoting itself to solicit investment, there are provisions to be wary of:

 “There are some considerations out there that suggest targeted performance... there is little guidance but the commission has made it clear through other avenues that whenever you’ve got a fund manager or investment advisor that said ‘we seek to beat the index by “x” percent’… you need to have a good faith demonstrable basis for that targeted return.”

Valuation

This focus is about a potential conflict of interest. When a manager tells investors one thing, but values their portfolio in a different way, thus leading to mistrust and confusion, the SEC is going to notice.

Custody

To have custody, you have to have access to the investor’s money. There are occasions when partners don’t realize that they have custody for various reasons, so awareness is very important. When you don’t have all the information, the decisions being made could be affected in a negative way.

Material Non-Public Information (MNPI)

Also known as insider trading, the SEC has struggled in the past with prosecuting claims as most cases tend to settle or lose traction. Davidovich points out that a lot of the time, people aren’t looking to share MNPI but do it accidentally. “It’s a lack of understanding of what happens or where the triggers are,” which means that investors are simply trying to gain knowledge or advice, but the use of expert networks can lead to issues with MNPI. When investment managers are doing research, they are constantly trying to talk to more senior personnel, who tend to be less trained in what they can and cannot say, which can lead to accidentally leaked MNPI. Adhering to a detailed and structured policy is the safest way to avoid succumbing to MNPI incidents.

To hear more from Ricardo Davidovich, Partner at Haynes & Boone LLP, including his thoughts on the 2015 seeding landscape for investment firms, watch our full webinar replay below. 

To read more on hedge fund technology and operations trends, check out these articles:

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