Valuation issues are becoming a stronger Securities and Exchange Commission enforcement priority, especially for private fund advisors, said Doug Scheidt, chief counsel of the SEC’s investment management division.
Scheidt noted there is a temptation among some advisors to overvalue funds to attract new clients and keep existing customers. He spoke Friday at the Practising Law Institute’s SEC Speaks forum in Washington, D.C., which annually features presentations by commissioners and executives from all of the regulator’s major units.
Scheidt said the SEC is increasingly looking for advisors who are favoring performance-based fee paying clients over non-performance fee clients, as well as advisors who are allocating successful investments to some clients at the expense of others.
He added that advisors with 15 or fewer clients who must now register with the SEC because of the Dodd-Frank Act are going overboard in looking for ways to continue to escape registration and oversight.
“It is like picking up a rock and seeing all sorts of swiggly things underneath,” Scheidt said.
SEC’s investment management division is doing a general review of Investment Advisers Act rules to see how they fit in with private funds, said the division’s director, Norm Champ.
Part of that review will include advertising regulations and the lifting of the ban on general solicitation, he said.
The SEC’s increased focus on private funds has come with the growth of private fund advisors who now account for 40 percent of all registered advisors in the aftermath of the Dodd-Frank Act.
Champ said another goal of the investment management division is to simplify variable annuity fund disclosures. He said his unit is drafting a rule to extend the summary prospectus mandated for mutual funds to variable annuities.