The SEC has launched a sweep focusing on “alternative investment strategies,” according to the Wall Street Journal. The article identified BlackRock and AQR Capital Management as firms among those included in the sweep. Norm Champ, Director of the Division of Investment Management, had previously indicated in a June speech that the sweep would cover between fifteen and twenty fund complexes.
The sweep letter is extensive in nature, and, among other things, requests board minutes and materials from “ad hoc presentations” for relevant funds over a two-year period, board minutes and reports discussing risk, liquidity, and leverage over a one year period, and a draft copy of the most recent board meeting minutes.
The agency’s 2014 examination priorities, released this past January, indicated that alternative funds would be a priority, with a particular focus on:
(i) leverage, liquidity and valuation policies and practices;
(ii) the staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and
(iii) the manner in which such funds are marketed to investors.
SEC officials have increasingly been discussing alternative funds in public addresses. Andrew Bowden, Director of the Office of Compliance Inspections and Examinations, indicated in a speech in March that the agency was beginning to conduct exams of alternative funds, which he described as “bright, shiny” but “sharp” objects. Bowden noted the sector’s growing popularity, and his concern regarding the illiquid and hard-to-value nature of alternative investments.
In the June speech, Champ also highlighted valuation and liquidity, but added leverage, disclosure, and oversight as areas of concern. Champ indicated that fund boards should review policies and procedures to ensure that they adequately cover these risk areas, and should also monitor for conflicts of interest by a sub-adviser between an alternative mutual fund and a private fund counterpart. Lastly, Champ also pointed to guidance released last year on the topic of misleading fund names.