Bruce Karpati, chief of theSecurities and Exchange Commissions enforcement division's asset management unit, has afew choice wordsfor hedge funds looking to get into the mutual fund space.
Karpati, speaking before theRegulatory Compliance Association, an operations and compliance advocacy group, last month said that the retailization of hedge funds has made it easier for unsophisticated investors to invest directly in hedge funds. Looking ahead, the elimination of the prohibition on general solicitation and general advertising as a result of the JOBS Act could have an immediate impact because, what were formerly private offerings, can now in some form be broadcast to a much wider audience, he said.
To counter possible fraud and market abuse by unscrupulous traders, Karpati urged hedge fund purveyors to have in place appropriate checks and balances where employees have overlapping, and potentially conflicting positions, such as a trader calculating the funds P&L, or a portfolio manager valuing the funds assets.
He also said that hedge funds operating as fiduciaries within the Investment Advisers Act of 1940 must guard against conscious and unconscious incentives that might cause him or her to provide less than disinterested advice since an investment adviser may be faulted even when he or she does not intend to injure a client or even if a client does not suffer a monetary loss.
Finally, he warned that all registered hedge funds need to be prepared for exam inquiries and, if need be, implement any necessary corrective steps if the SEC identifies violations within the firm to reduce the likelihood of more formal inquiries by the SEC.