Photo Credit: David Watmough
In December 2011, the SEC announced a new initiative entitled The Aberrational Performance Policy. The initiative's goals include the identification and scrutiny of high-performing hedge funds.
The filters through which funds are scrutinized include misrepresentations of conflicts of interest, liquidity, investment management credentials and strategy. Four complaints were filed under the new initiative between November and December 2011.
Another initiative/program rolled out over the past few months of 2011--The Problem Advisers Initiative--seeks to monitor securities laws compliance by advisers. Information routinely presented by the advisers to clients relating to experience, performance, credentials, and education are scrutinized under the initiative. By identifying adviser misstatements and nominal misrepresentations, the SEC hopes to identify potential problem advisers before investors lose money.
Using proprietary risk screens to screen SEC's proclaimed "outlier" funds--those returning higher than market returns with lower than market volatility--helps to identify mismatched strategies and returns. The goal of the analysis is to identify funds that routinely return 3%+ above the average market return, according to Robert Khuzami, Director of Enforcement at the SEC. Khuzami likens the initiatives to New York's "broken windows" strategy of the 1990s. Identifying small problems may alert the SEC to larger, more substantial issues.
In the wake of large fund and firm collapses, the SEC's front-runner approach is a wake-up call for funds lacking the proper controls and risk management systems. Fund statements, and the accuracy of these statements, are essential in today's relations with the SEC.