WASHINGTON (AP) – The Securities and Exchange Commission is ratcheting up scrutiny of the potential for insider trading at hedge funds.
The agency has sent hedge funds a detailed list of questions intended to ferret out employees and clients who would be in a position to acquire and pass along inside corporate information to managers of the investment vehicles.
“This is an effort to look out for potential insider trading at hedge funds and to ensure that hedge fund advisers are living up to their obligation to detect and prevent insider trading,” Mark Schonfeld, director of the SEC's New York regional office, said in an interview.
In a 27-page letter sent in August, the SEC's New York office asks hedge funds to send regulators a list of all employees and clients, and any relatives who serve as officers or directors of publicly traded companies. The SEC also asked for a list of all corporate executives or officials at brokerage firms that have invested in their funds.
The letter was obtained by The Associated Press.
Nora Jordan, a lawyer who advises hedge funds at Davis Polk & Wardwell, said the inquiry is unlikely to bear fruit, especially for large funds that have a reputation to uphold. “It would surprise me if they found some big smoking gun on this,” she said.
The letter was sent as part of the SEC's regular examination process to hedge fund managers that are registered with the SEC. While hedge fund advisers are not required to register with the SEC, many do.
The SEC came under congressional scrutiny last year after a former agency attorney alleged political interference by his superiors in an insider-trading investigation touching on a major hedge fund and a prominent Wall Street executive.
A report by Senate Republican staffers made public last month concluded that numerous missteps marred the SEC's probe. It recommended the agency establish a comprehensive set of procedures for conducting enforcement investigations.
Congressional investigators concluded in a report released Monday that the SEC needs to tighten its procedures for managing its caseload of enforcement investigations, which are separate from regular examinations.
Like mutual funds, hedge funds pool investors' money. However, they have much higher minimum investments than mutual funds and typically are much more active traders and take greater risks. Many of their holdings are less liquid than traditional bonds and equities and are difficult to price.
The funds also aren't required to register or file regular reports with the Securities and Exchange Commission. Further, they typically charge an asset management fee of 1 to 2 percent of the assets invested in the fund, plus a performance fee of 20 percent of a hedge fund's profits.
Because they're assumed to be riskier and offer less protection than more heavily regulated investments, hedge funds are generally only open to qualified investors, people with at least $1 million in net worth.