Hedge Funds Draw SEC Scrutiny in Crypto Coin Review

Wall Street’s main regulator has a new worry in its race to keep tabs on the cryptocurrency craze: hedge funds.

The U.S. Securities and Exchange Commission is examining the business practices of a cadre of funds set up to invest in cryptocurrencies and initial coin offerings — digital-token sales that give buyers stakes in companies, said three people with knowledge of the matter. Since hedge funds manage money for outside investors, the SEC wants to make sure firms are appropriately valuing holdings and keeping clients’ assets safe.

Crypto Funds Started Per Year

More than 220 crypto funds exist today

Source: Autonomous Research LLC

As part of its review, the SEC recently sent a number of requests to crypto-focused funds asking how they price digital investments and seeking information on their compliance with rules meant to prevent the theft of investors’ cash, said the people who asked not to be named because the examinations aren’t public.

In some instances, the regulatory scrutiny is more severe. Some funds have received subpoenas from the SEC’s Enforcement Division, which investigates firms for potential misconduct and punishes them if it finds wrongdoing, one of the people said.

There are about 220 crypto-focused hedge funds that manage at least $3.5 billion combined, according to Autonomous Research, which analyzes financial firms. While that makes the sector a small corner of the $3.2 trillion hedge fund industry, it poses challenges for the SEC. Many of the firms oversee less than $150 million, which means they aren’t required to register with the agency. Instead, they are typically regulated by the state in which they’re based.

SEC spokesman Ryan White declined to comment.

Reckless Investments?

The focus on hedge funds stems from concerns that have bothered SEC officials for months: They believe that investors are pouring billions of dollars into crypto assets without adequately assessing the risks and that some people profiting from the red-hot market may be breaking the law.

Jay Clayton, chairman of the U.S. Securities and Exchange Commission

SEC Chairman Jay Clayton has repeatedly cautioned that ICOs in particular are susceptible to fraud. Despite the warnings, the token sales have already raised about $3 billion this year, according to estimates from the website CoinSchedule.

Last week, the SEC reiterated that some digital-coin trading platforms might be skirting the law by not registering with the agency. And the SEC has already sent subpoenas to several companies involved in ICOs because it’s concerned they could be selling securities illegally, a person with direct knowledge of the matter said earlier this month.

What’s an ICO? Like an IPO But With Digital Coins: QuickTake QA

Some of the information requests recently sent to funds were issued by the SEC Office of Compliance Inspections and Examinations, or OCIE, said one of the people. If OCIE spots signs of misconduct, it typically refers its findings to the enforcement unit, which has a cyber group that has coordinated much of the agency’s review of digital tokens.

“The SEC has taken a very deliberate approach in this space,” said Peter Van Valkenburgh, director of research Coin Center, a Washington-based advocacy group. “I think they are just trying to get a handle on the large ecosystem.”

Scrutiny of how hedge funds value assets is common in SEC examinations because it directly impacts the level of fees that firms charge investors for managing their money. The more investments are worth, the higher the fees.

Speak Your Mind