SEC Is Looking Into Hedge Funds

The Securities and Exchange Commission is reviewing whether there is fraud in the $500-billion hedge-fund industry following several enforcement cases involving the funds, SEC Chairman Harvey Pitt said Friday.

“We are concerned about the implications flowing from the growth in these private investment funds,” Pitt said in a speech to the Investment Company Institute, which represents the mutual fund industry.

The review, being overseen by the SEC’s investment management unit, may lead to tighter controls over the largely unregulated funds, he said. Hedge funds don’t have to report their finances to the government, and SEC information about them “is sketchy,” Pitt said.

As Americans accumulated wealth in the ‘90s boom, hedge funds sought to broaden their appeal. The funds, which were designed for wealthy investors and typically seek more speculative investments, began trying to attract less wealthy, and perhaps less sophisticated, investors. This worries regulators because lack of regulation leaves the funds more exposed to fraud.

The SEC action comes as the agency is coping with the accounting deceptions of Enron Corp. and its auditor, Arthur Andersen, and has opened a broad investigation of possible fraud by Wall Street stock analysts.

The SEC inquiry, in addition to looking for signs of fraud, also will look at any conflicts of interest involving fund companies that operate hedge funds and mutual funds, Pitt said. Alliance Capital Management and American Express Asset Management are among the fund companies that operate both types of funds.

Alliance and American Express didn’t respond to requests for comment.