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SEC Enforcement Unit Focuses on Funds

During his testimony last week before the Senate Judiciary Committee, SEC Enforcement Division chief, Robert Khuzami, stated that his division's recently created an Asset Management Unit had its eyes on disclosure, performance, and valuation by funds and their advisers. 

Our Asset Management Unit, focused on mutual funds, private funds, and investment advisers, has developed several initiatives targeting disclosure, performance and valuation by funds and their advisers. For example, the Unit has launched a Bond Fund Initiative that focuses on disclosure and valuation issues in mutual fund bond portfolios. Based on practices identified in an examination of a significant bond fund complex, the Unit has collaborated with other Divisions and Offices within the SEC to develop risk analytics that identify red flags for further investigation, such as misrepresentations of leverage, outlier performance, and problematic valuations. In conjunction with the SEC's examination staff, the Unit also has developed a Problem Adviser Initiative - a risk-based approach to detecting problem investment advisers through on-going due diligence reviews of advisers' representations to investors related to their education, experience, and past performance.

In addition to these areas, Khuzami also announced an agency-wide initiative focusing on fund fees, with an aim at excessive fees charged to retail fund investors.  

The Asset Management Unit also has established a Mutual Fund Fee Initiative to develop analytics, along with other SEC Divisions, for inquiries into the extent to which mutual fund advisers charge retail investors excessive fees. These analytics are expected to result in examinations and investigations of investment advisers and their boards of directors concerning duties under the Investment Company Act.

Given the role of fund boards in approving fund fees, directors should be aware that the SEC may be giving their 15(c) deliberations some scrutiny. 

The full text of Khuzami's September 22, 2010 testimony is available at: