| July 8
July 8 A surge of investment in alternative
mutual funds has caught the attention of the U.S. Securities and
Exchange Commission, which will launch examinations of fund
companies targeting funds' leverage, liquidity and other
concerns, according to an official.
The series of examinations, which will likely begin this
summer or fall, will also gauge funds' compliance with
securities industry laws and regulations, said Norm Champ,
director of the SEC's Division of Investment Management, in
prepared remarks published by the agency late on Monday.
Among the issues: whether funds are properly determining the
value of securities they hold and disclosing risks to investors,
Champ originally made the remarks at a seminar for lawyers in
New York last week.
Champ's remarks (available at 1.usa.gov/1ssp3IS)
include significant details about the imminent examinations,
known as a "sweep," which SEC has been discussing since last
Alternative mutual funds typically employ investment
strategies that imitate those of hedge funds, such as investing
in private debt or shorting assets. Traditional mutual funds, in
comparison, generally invest in more standard asset classes,
such as stocks and bonds, for the long haul.
The SEC's review comes as yield-hungry retail investors
flock to alternative funds, which held $300 billion in assets as
of the end of May, Champ said. Investors poured almost $95
billion into alternative funds in 2013, more than five times the
amount they invested in 2012, Champ said.
Alternative funds accounted for just 2.3 percent of the
overall mutual fund market at the end of 2013, but investments
flowing into those funds represented almost one-third of all
investments into the entire industry, Champ said.
The examinations will initially include 15 to 20 fund
families, Champ said.
Examiners will home in on several areas, including whether
fund managers are complying with the law when they determine the
value of assets they hold. That would include derivatives and
illiquid assets, such as investments in private start-up
companies. Illiquid assets are trickier to value than
traditional stocks and bonds, Champ said.
The SEC also expects alternative funds to follow a
regulation that generally requires mutual funds to send payments
to investors within seven days after they redeem shares.
Champ said funds that invest too heavily in illiquid assets
should consider appropriate steps to ensure they can in a timely
manner pay investors who redeem their shares, as well as other
The SEC will also look into the quality of fund governance.
For example, a fund's board of directors must review and approve
the fund's compliance program, Champ said. He said that boards
should also steer clear of misleading fund names that suggest
protection from losses, among other promises.
In January, the SEC issued a risk alert directing investment
advisers to be cautious when they conduct due diligence, or
research, alternative investments.
(Reporting by Suzanne Barlyn)