The United States Securities and Exchange Commission (SEC) noticed the increase of investments in alternative mutual funds, which prompted the agency to examine regulatory issues related to leverage, liquidity and other concerns, according to an official.
Norm Champ, the director of Investment Management Division of the SEC, said the regulator will conduct a series of examinations. According to him, the SEC will probably start examining alternative mutual funds starting this summer of fall. Champ said the SEC will also measure the alternative mutual funds’ level of compliance with security industry laws and regulations.
Reasons behind growth of alternative mutual funds
Champ noted in his remarks that the alternative mutual fund market has more than $300 billion in assets by the end of May. Alternative mutual funds only represent 2.3% of the entire mutual fund market as of December 2013, but the inflows in those funds accounted 32.4% of the inflows of the entire mutual fund industry. According to him, the nearly $95 billion inflows into alternative mutual fund last year is five times more compared in 2012.
According to him, the growing interest in the retail market for fund offering distinctive investment returns if one of the reasons behind the expansion of the alternative mutual fund market. The SEC observed that the managers of alternative mutual funds disclose that they are pursuing investment strategies that are not closely tied to traditional benchmark or asset classes. “These investment strategies, traditionally only accessible to investors in private funds, are now being made more widely available through alternative mutual funds,” said Champ.
He also identified other factors behind the growing interest in alternative mutual funds including investment liquidity, portfolio transparency, lower advisory fees lower investor minimum requirement and lack of minimum eligibility requirements.
SEC initial examination involves 15 to 20 fund families
Champ said the SEC will review regulatory issues related with valuation, liquidity, leverage and disclosure. The regulator wants to find out whether alternative mutual funds are properly determining the fair value of the assets or securities they hold, and if they are disclosing the associated risks to investors.
According to Champ, the Sec will initially examine 15 to 20 alternative mutual fund families. The examiners will look into several factors including the compliance of fund managers with law in terms of determining the value of assets they hold (derivatives and illiquid assets). They will also examine the quality of fund governance among alternative mutual funds.