US Securities and Exchange Commission (SEC) Chair Mary Jo White has vowed to put fees and expenses for private equity and hedge funds high up the list of the regulator’s priorities.
In a speech at the Managed Funds Association’s Outlook 2015 Conference, White said the SEC was concerned in particular about hedge fund managers using misleading marketing materials and inadequately disclosing conflicts. Fee and expense practices of private equity funds were also troubling, she said—an area about which several large institutional investors have voiced concern.
“Investors must have the information necessary about their adviser and funds to make an informed investment decision.”Alarming practices included improperly shifting expenses away to investors by charging them for employees’ salaries, or hiring former employees as consultants, also paid by the investors. Additionally, White said the SEC continued to observe private equity managers collecting millions of dollars in accelerated monitoring fees without disclosing the practice.
“These cases underscore the value of our oversight and exam program, which identifies practices that would have been difficult for investors to discover by themselves,” White said. “Investors, regardless of their sophistication level, must have, and deserve to have, the information necessary about their adviser and funds to make an informed investment decision.”
White added that existing registration and reporting requirements has given the SEC a better picture of the broader industry, making it easier to identify and mitigate potential problems, such as conflicts of interest and inadequately disclosed fees.
“Private funds and their advisers obviously play an important role in the financial system,” White said, noting that private equity and hedge fund investors largely included individuals, pension plans, and nonprofit organizations. “It is therefore natural for the characteristics of your funds—their leverage, their concentration, their size—to be of interest to the SEC and our fellow regulators.”
White continued the SEC would continue to focus on addressing those risks that could impact the broader industry and even the financial system as a whole.
“Simply put, investors are not protected if broad and interconnected segments of the financial system are at risk,” she said.
These industry-wide risks include both operational risks as well as risks arising from investor services and market activities, White said—specifically, issues relating to data reporting, client account transitions, cyber security, and market stress.
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