They’re looking at you.
Rob Kaplan and Bruce Karpati, co-chiefs of the Asset Management Unit of the SEC enforcement division, held their first full staff meeting last week. This new unit will be focusing on misbehavior by private-equity funds, hedge funds, buyout firms, mutual funds and other asset managers. The unit is one of the five specialty units the SEC formed earlier this year.
Hedge funds use side pockets to protect new investments, long term investments and other assets that they do not want to liquidate in the face of redemptions in the fund. In the Great Panic of 2008 funds used side pockets to limit redemption.
One issue related to the side pocket is valuation of the assets. One reason for keeping the assets is because the fund managers feel the assets are not being properly valued in the market. On the bad side, the fund may be charging fees against the inflated value of those side pockets assets. Most side pocket assets are illiquid, which makes valuations difficult to determine.
One surprising priority for the unit is evaluating whether fund managers really have their own wealth invested in the fund when they are saying so in the prospectus and marketing materials.
It sounds like some enforcement proceedings are likely to appear in this area in the next few months.
- SEC Probes ‘Side Pocket’ Arrangements by Jenny Strasburg for the Wall Street Journal
- SEC Probes Hedge Funds’ Use Of Side Pockets by by Joseph A. Giannone (Reuters) in the New York Times
- S.E.C. Enforcers Focus on Avoiding Madoff Repeat by Jenny Anderson and Zachery Kouwe for the New York Times
- SEC Probing of Side Pockets in Compliance Avenue
- SEC sets up fund investigation unit By Peter Ortiz in the Financial Times
- SEC Rearranges its Enforcement Program – prior post
Picture is by Daniel Rosenbaum for The New York Times