SEC Grills Asset Managers | Chief Investment Officer

The Securities and Exchange Commission's asset management unit has a watchful eye on newly registered investment advisers, including hedge fund and private equity firms.

(October 12, 2012) — The US Securities and Exchange Commission (SEC) has introduced a compliance exam for newly registered managers, spurred by changes enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Under the SEC’s new campaign, the National Exam Program (NEP) would make private investment advisers, including hedge fund and private equity firms, no longer exempt from registering with the agency.

The exam would scrutinize the following “higher-risk areas of the business,” according to the SEC.

1) Marketing: “Investment advisers may utilize marketing materials to solicit new investors or retain existing investors,” the SEC noted. “NEP staff will review marketing materials to evaluate whether the investment adviser has made false or misleading statements about its business or performance record; made any untrue statement of a material fact; omitted material facts; made any statement that is otherwise misleading; or engaged in any manipulative, fraudulent, or deceptive activities.” The SEC added that it would review how investment advisers solicit investors for the private funds they manage, including the use of placement agents.

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2) Portfolio Management: NEP staff will review and evaluate investment advisers’ portfolio decision-making practices, including the allocation of investment opportunities and whether advisers’ practices are consistent with disclosures provided to investors.

3) Conflicts of Interest: “Some areas of the conflicts of interest that NEP staff will review includes: allocation of investments, fees, and expenses; sources of revenue; payments made by private funds to advisers and related persons; employees’ outside business activities and personal securities trading; and transactions by advisers with affiliated parties.”

The recommendations were outlined in a letter sent Tuesday, October 9, to thousands of the newly covered advisers from Drew Bowden, acting national associate director of the SEC’s examination and inspection program.

The regulator added that it would conduct meetings and seminars with the money management firms’ chief compliance officers.

“Managers should take every possible step to make sure they’re in full compliance,” Joseph Nodarse, head of institutional marketing at SEC-registered Tradex Global Advisors, told aiCIO in response to the new “presence exam” campaign for private investment advisers. “And they should hire a top-notch attorney to avoid mistakes–it’s so critical to make sure you do everything possible when you start a new fund. It’s so competitive.”

“Clearly,” he added, “regulation is part of our industry–sometimes it’s good, sometimes it’s overdone. But with institutions, it’s needed when it comes with a fund or product. After all, institutional investors wear their fiduciary responsibility hat everyday.”

(October 12, 2012) — Dutch pensions have restated the right to invest according to their own needs, rather than be used as a bail-out fund.

Reports from the Netherlands today have shown pensions coming under pressure from domestic banks to relieve pressure on their balance sheets as they feel the burden of the Eurozone crisis and impending regulation on capital adequacy.

Three of the largest Dutch banks have been sounding out pension funds over potentially buying chunks of mortgages that sit on their books, according to reports in the Wall Street Journal. The paper said Rabobank, ING, and ABN Amro, had consulted the investors – which between them manage almost €1 trillion in assets – on the possibility of taking on some of these financial products.

The move would not be the first time these large investors had taken on mortgages and other loan products. In August 2008, Standard Chartered became of the first financial institutions to enlist pension fund assets to improve its liquidity position, after bringing in pension fund investor PGGM as a partner on an innovative collateralised loan obligation deal worth $2.5 billion.

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As the bank’s sole partner, PGGM took on the higher risk tranches of a commercial loan portfolio for an undisclosed amount, in a deal to last an average three-and-a-half years.

However, the Wall Street Journal reported PGGM, which invests on behalf of the second largest pension fund PFZW, was not interested in such deals.

A spokesman for APG Asset Management, which invests on behalf of the largest Dutch pension ABP, told aiCIO: “The main goal for pensions is to make returns that can pay benefits. If we can do that in a way that helps the Dutch economy that is great, but it is not the overall aim.”

He said that over the past month increasing numbers of people within the financial hierarchy in the Netherlands had mooted the idea of pension assets being used to buy products from banks.

“The numbers they are talking about – several hundred billion euros – would be equivalent to a third of the country’s pension assets. This would mean the diversification we have strived for in portfolios would be destroyed,” he said. “We have been talking to the relevant parties, however, and if the characteristics of the investments fit with our needs there might be benefits for all in taking a closer look – but not at such a great scale.”

In the United Kingdom pension investment experts have called for pension funds to take advantage of deleveraging by banks – which must comply with strict new laws under Basel III – by buying good quality long-term debt that would fit the duration of liabilities.

The APG spokesman said: “It’s not fair if only pension funds are targeted to help out the banks – we do not need to move our investments.”

APG recently announced a deal to fund the maintenance of a road in the Netherlands along with a consortium of other European pension fund investors.