Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Julie M. Riewe, Co-Chief, Asset Management Unit, SEC Division of Enforcement identified enforcement priorities for hedge funds and private equity funds.

For private funds — meaning hedge funds and private equity funds — the AMU’s 2015 priorities include conflicts of interest, valuation, and compliance and controls. On the horizon, on the hedge fund side, the SEC anticipates cases involving undisclosed fees; all types of undisclosed conflicts, including related-party transactions; and valuation issues, including use of friendly broker marks.

The SEC will also continue to refine the analytics for the AMU’s signature risk initiative, the Aberrational Performance Inquiry, or API, which uses proprietary risk analytics to identify hedge funds with suspicious returns. In 2014, the Enforcement Division brought its eighth case generated by API.

On the private equity side, the AMU continues to work very closely with the exam staff and it expects to see more undisclosed and misallocated fee and expense cases like the Clean Energy Capital and Lincolnshire Management, Inc. cases it brought in 2014.

According to Ms. Riewe, an adviser’s failure to disclose conflicts of interest to clients subjects it to possible enforcement action.  Because disinterested investment advice — or, alternatively, clients’ knowledge of any conflicts that might render their adviser’s advice not disinterested — is at the heart of advisers’ fiduciary relationship with clients, the Asset Management Unit has aggressively pursued enforcement cases where appropriate.

Ms. Riewe noted that with respect to conflicts of interest, there is no exception to disclosure:

  • no “well-meaning or good-faith adviser” exception for an adviser that legitimately believes it is putting its clients’ interests first notwithstanding any conflicts;
  • no “mitigation” exception for an adviser that believes it has taken adequate internal measures to account for potentially incompatible interests; and
  • no “potential conflict” exception for an adviser that did not act upon the conflict to enrich itself at the expense of its clients.


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