PALM DESERT, Calif. - Ensuring that fund companies are complying with provisions of new anti-corporate fraud legislation will be at the top of the Securities and Exchange Commission's agenda for regulating fund companies in 2003, an SEC official said late last month.
Specifically, regulators are looking to ensure that the process that top fund executives use to sign off on shareholder reports is effective (see related story, page 1). SEC officials will also look to ensure that firms' disclosure controls, or the documented process for disclosing information to investors, is adequate. The requirements are provisions of the Sarbanes-Oxley Act, the anti-corporate fraud legislation that was precipitated by scandals at Enron, WorldCom and others.
They're Coming In'
"They're going to come in and look at what you're doing," Brian Bullard, the chief accountant at the SEC's Division of Investment Management, said in a reference to SEC inspectors. He was speaking at the Investment Company Institute's Tax & Accounting Conference here late last month.
Bullard said that the SEC also plans to initiate a "fact finding" investigation of the hedge fund industry, with an emphasis on whether alternative investments should be regulated.
"The staff, in all honesty, doesn't have a real understanding of these things," Bullard said.
Specifically, Bullard said the SEC wants to know how the products are marketed to investors. In contrast to mutual funds, the "rigorous disclosure of a '40 Act fund" is absent from hedge funds, he said.
"There have been no conclusions drawn yet," Bullard said.
Hedge Fund Hotline
Hedge funds, meanwhile, have provided one of the few bright spots for the mutual fund industry in this severe bear market. With assets flat at roughly $6 trillion this year, many mutual fund firms have been quick to open hedge funds, or open-end', 40 Act fund-of-funds that invest in hedge funds [see MFMN 9/2/02].
In addition, Bullard said that the SEC will continue to review fund companies' business-continuity plans, or plans designed to help firms plan for disasters such as the terrorist attacks of Sept. 11 [see related story, page 1].
Discussions regarding measures to prevent mutual funds from being used as money-laundering tools are also on the agenda next year, he said. The SEC looked into the issue last year, but Bullard said that "the staff has not had time to reflect on what it has found or not found, so it will continue to look into that."