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SEC Focusing On HF-Owned Broker-Dealers

A couple of weeks back the Securities and Exchange Commission announced that it was going to look closer at relationships between broker-dealers and hedge funds to keep a better eye on the HF industry.

A couple of weeks back the Securities and Exchange Commission announced that it was going to look closer at relationships between broker-dealers and hedge funds to keep a better eye on the HF industry. Now it appears the agency is hitting even closer to home. Walter Ricciardi, deputy of enforcement at the SEC, says the agency is stepping up its focus on broker-dealers owned by hedge funds. "I think some of the problems we've seen with hedge funds, one of the risk factors, red flags, is where they have their own broker-dealer. That creates quite a conflict in the sense that investors' money is sitting there and a hedge fund decided to trade through their own broker-dealer and [the hedge fund] gets a fee for such trading," Ricciardi said in an interview with Financial Times. "It gives them an incentive to run up trading fees. It may not be in the best interests of investors." Ricciardi noted that HF fees structures may have "attracted some miscreants," quickly adding that most HF managers are "very honest traders," but when "there is that much money and that much incentive to cheat, you're going to have some bad apples." Ricciardi pointed to one particular issue that crops up: "You have statements coming from the hedge fund to investors and there may not be sufficient controls over that." He said there have been instances where the agency has discovered phony statements with nonexistent investments posted on them. FT did not list those hedge funds that own broker-dealers, or any that have already been visited by the SEC.

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