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SEC Probe of Money Managers Should Also Include FINRA

Posted by Larry Doyle on September 13, 2010 10:11 AM |

In reading a Bloomberg commentary this morning, I could not help but think that policy implementations the SEC would like to impose upon money managers also need to be imposed in retrospect upon its regulatory kin at the Financial Industry Regulatory Authority (FINRA).  Let’s navigate. Bloomberg writes, SEC Probes Money Managers for Conflicts in Choosing Hedge Funds:

The U.S. Securities and Exchange Commission, stepping up its oversight of investment advisers, is examining whether asset managers that channel money to hedge funds are acting in investors’ best interest.

The agency asked money managers for information about their “due diligence” in selecting alternative investments such as hedge funds, private equity and venture-capital funds, according to a letter from the SEC’s Office of Compliance Inspections and Examinations obtained by Bloomberg News.

Longtime readers of Sense on Cents are well aware that in my reading and review of FINRA’s 2007 Annual Report (embedded in this link), I asked for information and disclosures regarding FINRA’s own internal investment portfolio.

Recall that the portfolio had investments in hedge funds, fund of funds, private equity, and, our ‘favorite,’ that $647 million holding of auction-rate securities. Let’s navigate further.

“This is further evidence of the SEC’s more proactive approach to the hedge-fund industry,” said Jay Gould, a former SEC attorney who’s now at Pillsbury Winthrop Shaw and Pittman LLP in San Francisco. “Hedge-fund managers, including funds of funds, can expect the agency to take a greater interest in their policies, practices and their relationships with investors and other fund managers.”

John Heine, an SEC spokesman, declined to comment.

IA Watch, a trade publication for investment advisers, reported the examination on Aug. 23. The Wall Street Journal reported on it today.

Investors use funds of funds to spread money across a variety of holdings, relying on managers to investigate the individual funds. Funds of hedge funds trailed the recovery in the broader market last year, as some were hurt by investments in Bernard Madoff’s Ponzi scheme, according to data from Chicago-based Hedge Fund Research Inc.

Interesting that Bloomberg references Madoff. Why? An outstanding complaint against FINRA by Amerivet Securities alleges that FINRA itself had money from its own internal investment portfolio in Madoff. Scratching your head in disbelief that Wall Street’s own self-regulatory organization may have had its own money invested in the largest Ponzi scheme? Grab some popcorn and watch this 18 minute video clip from a year ago in which yours truly and others discuss FINRA’s investment portfolio, including an allegation of an investment in Madoff. I humbly submit, Video Clips From America’s Nightly Scoreboard, Fox Business News, 9-03-09.

The questions surrounding FINRA’s investment practices remain outstanding. Might the SEC care to look into FINRA’s past practices while they also look into past and current practices of hedge funds, investment advisors, and money managers as well?

America deserves real transparency and disclosures from regulators as much as regulators deserve the same from those managing money.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Lou

    Would the SEC be willing to release information that may be embarrasing if not downright incriminating?

  • disenchanted

    Why would the SEC ever want any of this exposed now that the person who was the top executive of Finra is now the top executive of the SEC???? Putting those thoughts in writing just made me realize why someone making millions would take a job for just hundreds of thousands, “CYA”. How better to be sure none of the dirt is ever exposed, especially when you have the judge in your pocket.






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