Analysis & Opinion

Philadelphia (Reuters) — Some newly registered U.S. hedge fund advisers are cherry-picking investments to showcase their performance and improperly changing how they value securities, an agency official said on Monday.

Andrew Bowden, head of the SEC’s Office of Compliance, Inspections and Examinations, revealed preliminary findings to an audience of compliance professionals as the agency reaches the tail end of a two-year effort to examine newly registered hedge fund and private equity fund advisers. The affected advisers, each managing more than $100 million in assets, registered with the SEC in accordance with the 2010 Dodd Frank financial reform law.

Hedge fund advisers, in some cases, are showcasing performance of specific investments they made in prior years, a in violation of SEC regulations prohibiting cherry-picking, the report said.

Advertising rules can be tricky for those new to SEC regulation, Bowden said in Philadelphia at a conference organized by IA Watch, a trade publication. If you’ve never been in this business, the rules on marketing and advertising are not intuitive, Bowden said.

Some advisers cherry-picked in response to questions from institutional investors who were researching funds. Those investors commonly ask for examples of specific investments that hedge fund advisers had recommended and performance track records for those securities, Bowden told reporters.

Some advisers also changed their methods for determining the value of securities in their funds, Bowden said. The switching, which can inflate returns, was not always disclosed to investors, Bowden said.

The SEC anticipated examining roughly one-fourth of the roughly 1,200 hedge and private equity fund advisers who registered with the SEC because of Dodd Frank, Bowden said. Examiners have completed 370 exams — roughly split between hedge and private equity funds — and aim to conduct a total of 400 before the project is complete, Bowden said.

He declined to quantify the frequency of the problems he discussed but said the incidents were isolated. The agency will publish a report of its findings when the process is complete, he said. A time table for that is unclear.

The SEC has uncovered a wide array of problems among private equity funds, said SEC Chair Mary Jo White in testimony before U.S. lawmakers in April.

They included misallocating fees and expenses and charging improper fees to portfolio companies or the funds they manage.

(Reporting by Suzanne Barlyn)