Karpati highlighted the SEC’s past enforcement activity concerning hedge funds (including several cases where the SEC alleged funds fraudulently overvalued their holdings) and signalled that the SEC’s emphasis on such activity will continue.
Karpati heads the asset management unit, whose central focus is on hedge funds and investment advisers to alternative investments and private funds. The AMU was created in part to understand better the workings of the hedge fund industry and the diversity of hedge funds’ investment strategies, in order to handle the challenges in detecting and combating possible fraud.
Notably, the AMU has hired “industry professionals such as hedge fund managers” and private equity analysts who now assist on investigations and exams, conduct training and “assist on policymaking”. According to Karpati, “these industry professionals have already been successful in uncovering issues that we may not have identified otherwise. We like to say: ‘they know where the bodies are buried – and understand how they got there.’”
Karpati stressed that despite the demands on hedge fund managers, compliance must be given adequate time and resources. This includes carrying out periodic comprehensive reviews of the funds’ operations – including testing the funds’ valuation methodologies – to identify gaps in compliance programmes or to assess if changes are needed in light of new activities or products offered by the fund.
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