Regulators to Scrutinize ‘High-Risk’ Funds

The Securities and Exchange Commission, which in February required most hedge funds to register as investment advisors, is now targeting funds that have weak internal controls for regulatory action, a senior SEC official said Wednesday.

The agency, which beefed up its compliance division in the wake of the new registration rules, is planning audits at least every three years for funds that meet this “high-risk” criteria, said Elizabeth Jacobs, deputy director of the SEC’s Office of International Affairs.

“Those with higher risk will have increased scrutiny,” Jacobs told a hedge fund gathering in the Cayman Islands, home to the world’s largest number of offshore hedge funds, numbering about 7,100 and growing.

Factors related to a fund’s “internal control environment” are at the center of what constitutes high risk, said Jacobs. She declined to elaborate, but insider trading violations and market manipulation have in the past been indicators of weak trading compliance controls.