SEC Official Calls Out Private Equity and Hedge Fund Industry
The Chief of the SEC’s Enforcement Division’s Asset Management Unit, Bruce Karpati, recently announced that the his unit has launched a “Private Equity Initiative” to “identify private equity fund advisers that are at higher risk for certain specified fraudulent behavior.” As an example, he cited “zombie funds” that delay liquidation to continue to receive income. In the same speech, Mr. Karpati raised serious concerns about hedge funds and other private funds because of “complex, illiquid or opaque investments,” an “emerging retail orientation” of private funds, and the JOBS Act, which will allow broader distribution. Mr. Karpati also expressed concern about a business model that misaligns incentives and may result in breaches of fiduciary duty. He cited the importance of performance fees and the resulting incentive to inflate valuations, the temptation to engage in insider trading, and conflicts of interest including related-party transactions.
OUR TAKE: For newly registered managers, this is your clarion call to implement a legitimate compliance program. Mr. Karpati is expressing the SEC’s long-held prejudice against hedge and private equity funds.