Hedge fund managers may soon face a new regulatory nemesis: Their peers.
Bruce Karpati and Robert Kaplan, co-chiefs of a Securities and Exchange Commission task force targeting hedge funds, buyout firms and mutual funds, are seeking five fund managers, chief operating officers or people with “direct exposure to trading and operations” at investment firms. The SEC placed its help-wanted ad last month.
The group is at the centre of Enforcement Director Robert Khuzami’s effort to boost oversight of the $14 trillion fund industry after frauds, including Bernard Madoff’s Ponzi scheme, led lawmakers and investors to question the agency’s expertise. The recruits are meant to help dozens of veteran SEC attorneys better understand the industry.
“There’s been a lot of soul-searching within the enforcement division and the agency about what is the best way to identify and catch misconduct as early as possible,” Kaplan, 43, said in an interview. “Normally, law enforcement is inherently reactive.”
The task force is among five specialty units the SEC is forming this year to target misconduct ranging from insider trading to corporate bribery. Kaplan and Karpati, who plan to have the majority of their staff in place within a few weeks, will focus initially on asset valuations, preferential fund redemptions, conflicts of interest and selective disclosure, they said.
“The fund world has become much more sophisticated and complex over the last decade,” said Steve Crimmins, a former SEC trial lawyer now at K&L Gates LLP, which represents asset managers. “The SEC hasn’t had the resources or the full expertise needed to keep pace.”
The SEC struggled to keep up as the number of registered investment advisers jumped 50 per cent to more than 11,000 from 2002 to 2009, the former head of the agency’s inspections office, Lori Richards, told Congress last year. The agency had fewer than 500 employees assigned to examine advisers during those years. The expansion doesn’t include many offshore hedge funds and others that don’t voluntarily declare their existence to US regulators.
Kaplan and Karpati, 40, said they plan to open more probes based on the agency’s own risk analysis in addition to addressing investor complaints. To do so, they are conferring with a unit the SEC created last year, the Division of Risk, Strategy and Financial Innovation. Henry Hu, who heads the risk office, hired former hedge-fund manager Gregg Berman and ex- Morgan Stanley trader Richard Bookstaber.
Karpati and Kaplan hired recruiting firm Korn/Ferry International to find fund experts. The government jobs pay $198,333 to $210,232, a sliver of what executives can earn in the industry, said George Davis, a managing director at recruitment firm Egon Zehnder International in Boston. Many hedge funds pay managers 2 per cent of assets they oversee, plus 20 per cent of profits they generate.
“Someone at the end of their career looking to do public service” might seek the SEC positions, Davis said. “Or somebody typically at the early or middle stages of their career looking for the stamp of honor.”
Some applicants may just be hungry for work. The financial crisis prompted hedge fund closures and forced investment companies to slash more than 7,500 jobs, according to disclosures by US firms.
In 2007, Karpati helped found an agency-wide working group on hedge funds that held training sessions and meetings as issues arose.
Karpati also investigated whether hedge funds and investment advisers abused so-called soft-dollar payments, manipulated markets and engaged in insider trading, including a case involving credit-default swaps.
Kaplan has helped uncover networks of Wall Street traders sharing illegal tips, including alleged rings involving billionaire Raj Rajaratnam and former UBS AG manager Mitchel Guttenberg. Rajaratnam has denied wrongdoing. Kaplan also brought cases against hedge funds and private-equity funds for unauthorized trading and misleading investors, as well as the first regulatory case targeting stock manipulation during the credit crisis.
The application period is set to close April 19. Karpati and Kaplan declined to identify candidates, saying only that some are from firms that are household names.
“There are a lot of people with a public service mentality. They’ve had enough of the industry and they want to do something for the public at large,” Karpati said. “It’s an incredible opportunity to come to these units at a groundbreaking moment and work on issues that are at the core of their industry.”
