WASHINGTON - Investors are not the only ones interested in hot initial public offerings.

SEC examiners this year will pay special attention to how mutual fund complexes allocate hot IPOs among the funds in their group, said Lori Richards, director of the SEC's office of compliance, inspections and examinations. In addition to examining fund advisers' IPO policies - a longstanding SEC practice - the SEC staff this year will be looking at how firms over time have made exceptions to those policies.

The SEC wants to make sure that firms have not developed a pattern of exceptions to their IPO allocation policies that consistently favor some funds within a fund group, Richards said. The agency also wants to make sure that hot IPO allocation practices are consistent with a fund group's stated allocation policies, Richards and other top SEC officials said.

"The problem occurs when exceptions are made," said Elizabeth A. Salini, assistant district administrator in the SEC's Boston office.

Richards and Salini made their comments during an industry conference, "The SEC Speaks." The conference, sponsored by the Practicing Law Institute of New York, was held March 3rd and 4th. Richards elaborated on her remarks in an interview.

Fund IPO allocation practices are one of several priorities for SEC examiners this year, SEC lawyers said. Others include:

* Fund advertising;

* Personal trading policies and practices by top fund executives and portfolio managers;

* Funds' efforts to seek the best execution for their securities transactions; and

* Integration of compliance systems and procedures at recently- merged fund companies.

Hot IPO allocation policies are important because hot IPOs improve a fund's performance, an improvement that can be dramatic in a small fund. Hot IPOs appreciate in value immediately after they go on the market. Funds and other institutional investors frequently flip IPOs, selling the hot shares as soon as they get them. Flipping a hot IPO generates risk-free return.

Problems arise when a fund complex can not obtain all of the hot IPO shares it seeks. The fund adviser then must allocate the hot IPO shares it does receive among all funds in a complex.

Most firms have a policy on how they allocate hot IPOs among funds in their complex, Richards said. Trouble can occur, however, when funds make exceptions to their allocation policies. The SEC plans to examine exceptions that funds have made over time to insure that a fund complex's practices are not unfair or inconsistent with the fund group's stated allocation policies, Richards said.

The SEC has made the issue a focus of exams this year because of the hot market for IPOs, Richards said.

Fund advertising also is a top priority of SEC examiners this year, SEC officials said. The agency will pay particular attention to whether ads disclose critical factors that contribute to a fund's performance, SEC lawyers said.

In exams, SEC officials will look to see whether funds with returns far higher than their peers took unexpected investment steps to boost performance, said Gene Gohlke, associate director of the office of compliance, inspections and examinations. For example, 92 funds last year had performance that was significantly above the performance of their peer group, SEC officials said. If funds have done something out of the ordinary to outperform their peers- such as investing outside of the funds stated investment objectives - the SEC will check to see if funds are disclosing that fact to investors, Gohlke said.

Richards also provided an overview of exams that her office conducted last year. SEC examiners inspected approximately 260 fund companies last year, she said. Of those, matters arising from the inspection of about 20 of the firms were referred to the SEC's enforcement division for further investigation, Richards said. She declined to identify the firms. No one problem was common among the referrals, she said.

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