Client Alert

SEC Scrutinizing Hedge Fund Side Pockets

May 06, 2010

Kenneth M. Breen, Douglas Koff, Keith Miller, Barry Sher, Sean T. Haran, and Kevin Broughel

In late 2009, the Director of the SECs Division of Enforcement, Robert Khuzami, singled out the hedge fund industry as one that would be the focus of increased enforcement scrutiny, stating: We at the SEC are committed to pulling back the curtain on hedge fund operations and taking a closer look at their activity. In January 2010, the SEC formally announced the creation of various specialized enforcement units to combat financial fraud and other illegal conduct in certain high priority areas. One such unit is the Asset Management Unit, a group comprised of roughly 60 SEC enforcement attorneys spread across nine offices, tasked with focusing on investment companies, investment advisers, mutual funds, hedge funds and private equity funds. The Asset Management Unit met for the first time last week and reportedly focused on certain topics currently under investigation. Of particular interest, the SEC is reportedly investigating the use of side pockets by hedge fund managers, and whether hedge funds are properly assigning fair values to side pocket assets while accurately disclosing information to investors. The investigations reportedly target hedge fund managers, but it appears that the conduct of directors, administrators, and auditors will be under scrutiny as well.

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