SEC expects to file more hedge fund actions

The Securities and Exchange Commission expects to file more enforcement actions against hedge funds over illegal trading and violations of client trust, the agency’s head of enforcement said Monday.

The SEC is “worried” about both kinds of misconduct, Linda Thomsen, the agency’s director of enforcement, said at a securities conference in New York. “I expect to see activity in connection with both,” she said.

Prime brokerages, which lend to hedge funds and arrange their trades, must also become more vigilant in watching for illegal conduct, Susan Merrill, the head of enforcement at the New York Stock Exchange, said at the conference.

Regulators and lawmakers have grown more concerned about hedge fund oversight since a federal appeals court in June shot down SEC rules requiring them to register and submit to random inspections. The largely unregulated pools of private capital have more than $1.3 trillion in assets worldwide, more than double the amount under management five years ago, according to Hedge Fund Research Inc. in Chicago.

Regulators have repeatedly learned to “follow the money,” the SEC’s Thomsen said Monday. “These days, the money is in hedge funds, so the potential for abuse, the potential for securities law violations is there because there is so much money there.”

SEC Chairman Christopher Cox said last month that the agency would focus more on potential insider trading by hedge funds, because of suspicious buying and selling in advance of corporate mergers. In an interview last week, Cox said the SEC would propose rules in December to raise hedge fund investors’ asset requirements.

Prime brokers may also be held accountable if they fail to detect signs that hedge funds are conducting improper trades, such as selling a company’s stock short and intending to cover the transaction with shares to be purchased in the company’s secondary stock offering, the NYSE’s Merrill said.