Roye: Products Could Create Conflict of Interest Issues

A growing number of mutual fund managers are adding hedge funds and alternative investments to their product offerings, raising possible conflict of interest issues and the potential for abuse, said Paul Roye, director of the Securities and Exchange Commission's division of investment management in a speech he made yesterday.

Hedge funds and alternative investment products are attractive to fund managers because they offer higher fee revenue and are popular with the lucrative high-net-worth market, Roye said yesterday speaking to executives attending a symposium on pension funds. Fund managers are are also adding hedge funds in order to retain star portfolio managers, he said.

The SEC is closely monitoring the fund industry for potential conflicts of interest, Roye said. 'We expect firms to have compliance procedures in place to address these concerns and we will seek to examine these procedures in the inspection process,' he said.

The potential for a conflict of interest for fund companies lies in the differences in fee structures between standard mutual funds and hedge funds, he said. Portfolio managers could be tempted to favor a hedge fund over a mutual fund in their investment decisions or manipulate trades in standard funds in order to benefit a hedge fund, he said.

A copy of Roye's speech appeared yesterday on the SEC's web site.

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