By Svea Herbst-Bayliss
BOCA RATON, Fla., Jan 23 (Reuters) - U. S. securities
regulators are watching hedge funds more closely than ever, and
former Securities and Exchange Commission officials and industry
experts are urging managers to be ready when federal examiners
For roughly a year now, once-secretive hedge funds have been
forced to open up about how much money they manage, the kind of
clients they have and how they plan to make money.
While many managers may have hoped that the requirement to
register with the SEC, part of the Dodd-Frank financial reform
act, would go away, experts say the new rules are here to stay
and may even get tougher.
"The election only affirmed Dodd-Frank," said Mark Calabria,
director of financial regulation studies at the CATO Institute,
a think tank. "The government can now move from a posture of
Indeed, many managers are now worried about a possible
"witch hunt" from regulators ready to make an example of a fund
that has been sloppy in enforcing the new rules.
"The SEC is starting to make surprise visits, they want to
make their presence felt," said Deborah Prutzman, CEO of
Regulatory Fundamentals Group, which guides managers on facing
Managers worry even more about the government's ongoing
insider trading probe, which has seen prosecutors and federal
agents knocking on doors and actually arresting people.
Their efforts have circled in on prominent funds, including
Steven A. Cohen's SAC Capital Advisors, in an effort to see
whether these funds rely on illegally obtained information to
gain an edge. Neither Cohen nor SAC have been accused of any
Some 40 percent of the SEC's current cases revolve around
"They want to string someone up by the yardarm," Paul
Atkins, a former SEC commissioner who now runs Patomak Global
Partners, said. "I don't see that happening, though," he added.
Still, government examiners will come knocking, and experts
urge managers to be ready to answer all questions.
"Hedge fund managers need to understand that they need to
stay ahead of the information that the SEC already has on them,"
said David Thelander, a former SEC enforcement lawyer who is now
a managing director at regulatory advisory consulting group
Promontory. This means having data available on how funds traded
around releases of key corporate releases and having a handle on
how their analysts used expert networks, for example.
David Kotz, a former SEC inspector general and now director
at Berkeley Research Group, told managers to welcome the SEC.
"Interact with them more," he urged. "The more you schmooze
them the better it will be."
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