The SEC is getting Serious

On Wednesday April 9, 2011 I was invited to the “Hedge funds” seminar hosted by K&L Gates.  The discussion was primarily driven around how the SEC will conduct exams of “private funds”.  The prestigious panel of seasoned and knowledge individuals included:

•   James Capezzuto – Associate  Director, Securities Exchange Commission
•   Lisa Conrad  - Chief Compliance Office and Deputy GC, Angelo Gordon & Co.
•   Gary DeWall - Group General Council Newedge USA, LLC
•   Bruce Karpati – Co-Chief, Asset Management Unit , SEC Enforcement Division
•   Stephen Crimmins – Partner, K&L Gates LLP
•   Beth Kramer -  Partner, K&L Gates LLP
•   Amy Poster  - Senior Advisor – Audit, US Department of Treasury, Office of the Special Inspector General Troubled Asset Relief Program

Bruce and Jim of the SEC indicated that they have hired at least 10 experts in the New York office to assist in the exams and enforcement inquires.  The individuals include experts in the following areas; portfolio manager of a hedge fund; analyst,  trader, quant, structurer of  products .  The move towards hiring experts indicates that the SEC is serious about understanding the alternative asset management industry and conducting a more in-depth targeted exam .  As I previously stated in my Blog, the SEC is hiring smart people who know your business.

 

How the SEC will conduct exams

Jim Capezzuto indicated that during the exam, there will be more communication between the exam and enforcement divisions.  In fact Jim and Bruce indicated that in certain instances an enforcement unit member could join the exam unit in the field.  The examiners will update the enforcement unit on issues as they arise and will not wait until the end of the exam.  In this way, the SEC can work together with the member firm to obtain more information regarding any issue(s) that arise and the SEC can make a quicker more informed determination of whether an enforcement action needs to be initiated.

Jim and Bruce also indicated that at least 60 individuals from the insider trading unit will or have already been transferred to the “funds” division to handle the anticipated increase  in exams. 

Jim indicated that each exam will be “scoped individually”.  The exam will be conducted with an emphasis on the risk profile of the firm and be be initially scoped based on the information provided by the member firm through quarterly or annual filings.  The internal governance, control environment and transparency of the member firm will be of interest and a top down approach of examining the member firm will be employed.   

Interviews of key individuals will take place and based on the results of these interviews and documentation provided by the member firm, the SEC examiners will determine which areas of the business or infrastructure they will drill down into.

Tomorrow I will write the second part of this post.  This will include new initiatives at the SEC, the SEC's view of outsourcing the compliance department of member firms and the importance of internal controls.   

Keep reading.