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SEC steps up style drift probe

The SEC has revealed it is looking for evidence of style drift in its examinations of hedge fund managers and other registered investment advisers

The agency is using data mined from Form ADV, Form PF and other regulatory filings for evidence a manager has deviated from its disclosed strategy.

“In the portfolio management space, we’re going to be looking broadly at whether the portfolio management practices are being done in accordance with disclosure and if there are changes in investment mandates,” Kristin Snyder, deputy director of the SEC’s compliance inspections and examinations office (Ocie) told PLI’s SEC Speaks event in Washington DC.

Snyder said the SEC is responsible for overseeing more than 13,000 investment advisers and more than 10,000 registered investment companies nationwide.

To handle the vast amount of data gathered from filings of so many managers, the SEC in 2009 added a risk, strategy, and financial innovation division and within that, offices of quantitative research, risk assessment and interactive data.

Charles Koretke, assistant director in Ocie’s risk analysis and surveillance unit, said a greater use of technology to analyse data allows Ocie to keep abreast of risk and control issues and themes.

Generally, a hedge fund’s private placement memorandum contains disclosures to allow for some style drift – or deviation from the stated strategy – in periods of market upheaval or a lack of investment opportunities in the stated strategy.

The disclosures do not give fund managers blanket authorisation to switch fund strategies at will.

Portfolio management and trading are examination priorities for Ocie.

Examiners are looking at firms’ practices to ensure managers are fairly allocating investment opportunities among clients; investments are consistent with clients’ objectives; and examining portfolios for investment or style drift. The focus on style drift was mentioned in Ocie’s 2019 exam priorities.