Andrew Bowden unloaded a truckload of information at the recent CFA Institute in Boston. Andrew Bowden is the Director of the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations. His comments were based on audience questions, instead of a prepared speech. You can’t find it on the SEC website, but you can watch it at the CFA Institute’s website.
Of the 1,500 private fund advisers that registered because of Dodd-Frank, the SEC set out to examine roughly 25 percent of these firms by the end of 2014. According to Bowden, 370 firms have been examined, and OCIE is on track to reach 400 by the end of the year. Half of those are hedge fund managers and half are private equity fund managers.
Bowden noted his May speech on fees and expenses at private equity funds.
He said the deficiencies for hedge funds largely fell into three main categories: Custody, valuation, and marketing/advertising. On the positive side, he found hedge funds to be doing a generally good job on compliance. The marketplace of institutional investors demanded it.
(The contrarian in me will argue that SEC examiners merely better understand hedge funds than private equity funds.)
The custody-related deficiencies were mostly technical in nature. For example, the hedge fund may have an account that was not subject to an audit.
Regarding valuation, the SEC found that some firms were switching their valuation methodology from period to period to achieve the highest possible investment valuation.
For the marketing-related deficiencies, the SEC examinations discovered that most of failures were mostly technical failures under the SEC rules. Some of that can be chalked up to moving from pre-registration materials to post-registration requirements. In some cases, hypothetical and/or back-tested performance was being represented as actual performance, portability situations were being improperly documented and disclosed, and inappropriate benchmarks were being used. He focused that false claims of compliance with GIPS is a material misrepresentation. He also used the Bitran case as an example of false performance advertising.
Bowden also highlighted the SEC’s new national exam analytics tool, which allows its examiners to rapidly analyze trade data.
“Three years ago, an SEC examiner would go into a firm and ask to see its trade blotter for the past two weeks or month, put it into Excel, sort it into columns, and try to spot signs of cherry picking, front running and insider trading,” he said. “The quants developed a tool that allows examiners to see the trade blotter for three years as a standard practice and subject that to more than 50 tests.”
He also highlighted the never-before examined initiative. That has reached about a significant chunk of the 20% of the firms registered for 3 years that had never before been examined. He also noted that several regional offices are calling new firms as they register for an hour long call.
Sources:
- SEC Update from Andrew Bowden at the CFA Institute
- Highlights from Andrew Bowden’s Speech at the GIPS Standards Conference: GIPS, Data Analytics, Wrap Accounts and Common Deficiencies
- SEC Focus on Private Fund Performance and Marketing (October 2, 2014)
- SEC quants find signs of ‘cherry picking’ at US hedge funds
- Faking Your Returns – the Bitran case
- Fees, Expenses and the S.E.C.
