Director of the SEC Division of Investment Management Discusses the Current State of Hedge Fund Management (with Mehta Comment)

At the Hedge Fund Management Seminar, SEC Division of Investment Management Director Norm Champ delivered remarks regarding the current state of the hedge fund industry, compliance issues for hedge fund advisers, and alternative mutual funds.

According to Mr. Champ, the regulatory landscape for hedge fund managers has changed greatly over the past few years, and the number of SEC-registered private fund advisers has increased by more than 50 percent. Mr. Champ stated that the SEC has improved its information on private funds as a result of improvements to Form ADV and Form PF, and that it is now up to regulators to transform this information into strong regulatory programs. One program that Mr. Champ praised was the SEC's Risk and Examination Office, which examines the investment management industry to inform the SEC's policymaking.

Mr. Champ highlighted current compliance challenges for hedge fund advisers. He explained that compliance policies and procedures must be specifically tailored to a firm's advisory business, and should evolve and grow with the business. Additionally, he stated that advisers must be vigilant in identifying, disclosing and managing conflicts of interest, noting that it is important for advisers to review continuously their business models to identify emerging conflicts and risks. He also reminded firms that conflicts must be disclosed to investors before they invest in a fund, and that disclosure must be "meaningful."

Mr. Champ then discussed the importance of alternative mutual funds, which are subject to registration and regulation under the Investment Company Act. According to Mr. Champ, the market for these funds is growing rapidly, and many hedge fund advisers are becoming involved in them either as sub-advisers or by launching their own registered investment companies. Additionally, he explained, alternative mutual funds present heightened risks in areas such as compliance programs, conflicts of interest, valuation, portfolio management and marketing.

Mehta Comment: One takeaway from Mr. Champ's speech is that various divisions of the SEC are not only reviewing information submitted on Form PF, but also using the Form PF information for SEC initiatives. The OCIE reviews Form PF information while preparing examinations and determining whether Form PF information is inconsistent with publicly available documents (i.e., Form ADV), disclosures to investors and other information obtained during examinations. Enforcement also uses Form PF filings in connection with its investigations, and certain performance information has resulted in the identification of fraudulent or improper conduct. Registered investment advisers are reminded to review all relevant filings and documentation to ensure consistency and accuracy in their disclosures.

See: Mr. Champ's Speech.