Risk & Compliance

SEC Probing Private Equity, Hedge Funds

The commission is reportedly investigation possible insider trading in takeovers spawned by private partnerships.
Stephen TaubOctober 19, 2006

Illegal insider trading is apparently a growing concern at the Securities and Exchange Commission. In fiscal 2006 ended in September, 20 percent of all SEC probes opened dealt with insider trading, up from 18 percent the prior year and 17 percent in fiscal 2004, according to Reuters.

SEC Chairman Christopher Cox reportedly said that one reason for the rise is possible insider trading in takeovers spawned by hedge funds and private equity firms, according to the wire service. “That is an increasing area of enforcement attention,” Cox reportedly told reporters after an SEC meeting in Washington. “We have a number of ongoing investigations. The pace of our investigative activity has been quickening on this for some months.”

To be sure, insider trading has always been a major concern at the SEC, especially after a merger or acquisition is announced. But as private equity and firms and hedge funds have become larger in number as well as size and their involvement in deals has rapidly grown in recent years, the regulator appears to be watching their transactions more closely.

SEC spokesman John Nester told CFO.com that “insider trading could be just as involved when it comes to hedge funds and private equity firms. It’s something we’re aware of and we’re looking at.”

Such private partnerships, however, are not the only ones being monitored closely by the commission. On Thursday, the SEC’s Lori Richards told Reuters in an interview that the Office of Compliance Inspections and Examinations, which she heads, is closely analyzing information flows through securities firms.”

“That information is very, very valuable,” she told the wire service.

The SEC has been very focused on informational controls within broker-dealers, transfer agents, clearing agencies, investment advisers, and investment companies looking for both intentional and unintentional information leakage.

“What we are very focused on is the large-trade, front-running sort of insider trading that would not result in aberrant trade or volume kick-outs,” Richard told Reuters.

Such news is likely to be welcomed by finance executives and other top corporate officials, since they have increasingly become targets of aggressive hedge fund and private equity investors. The latter have been accused by critics of “unofficially” enlisting support from other investors to help strengthen their demands.