The U.S. Securities and Exchange Commission (“SEC”) has formed a new group to increase oversight of private equity and hedge funds. The SEC has assigned two former industry veterans to oversee the unit. The SEC frequently creates these units when it sees increased activity in a particular type of investment product or is concerned that a particular segment of the securities industry may be violating the federal securities laws. Over the last decade, alternative investments such as private equity and hedge funds have become very popular, and sales of these types of funds have expanded from the institutional level to the retail investor level.
The SEC’s 2014 Compliance Outreach Program focused on alternative investments such as hedge funds. Private funds run by private equity firms, hedge funds, venture capital funds and other alternative investments have been the subject of heightened scrutiny during the last several years, furthered by the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the financial crisis.
At the 2014 SEC Compliance Outreach Program, the SEC brought attention to a number of concerns it has relating to private equity. Among the SEC’s rising concerns in this area are vague limited partnership agreements and poor disclosure practices to limited partnerships at private equity funds, the shifting of fees and expenses at those funds, and misleading performance and valuation metrics at private equity firms and hedge funds.