Securities And Exchange Commission Creates New Private Fund Unit Dedicated To Examination Of Private Equity And Hedge Funds

On April 7, 2014, it was announced that the United States Securities and Exchange Commission (SEC) has created a new private fund unit dedicated to the examination of private equity and hedge funds.

The new group is another example of increased regulatory oversight of the financial services industry following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Pub. L. 111-203, H.R. 4173. As a result of Dodd-Frank, many investment advisers, hedge funds, and private equity firms are now subject to registration requirements with the SEC. This has resulted in increased government scrutiny of hedge funds, funds managed by private equity firms, and real estate and venture capital funds.

An important issue for the SEC is that many hedge funds and private equity firms maintain complex and illiquid investments that are more difficult to value than investments at traditional asset managers. Additionally, at the 2014 Compliance Outreach Program, the SEC identified several areas of concern with private funds, including vague limited partnership agreements, insufficient disclosure practices, shifting of fees and expenses, and unclear performance and valuation metrics. Moreover, the SEC has historically primarily focused on the regulation of public asset managers - such as mutual funds - that have been regulated since the 1940s. As a result of its lack of specialized regulation and examination, the agency has been criticized for failing to detect and thwart...