Regulators Scrutinize FoF Products

Chidem Kurdas

US Securities and Exchange Commission staff are apparently looking closely at the details of fund of funds offerings. One instance that emerged concerns products from  Swiss-based fund of funds manager Gottex.

This summer the SEC asked Gottex to clarify certain aspects of its repurchases of fund interests from investors.

Among the clarifications demanded was whether a provision in fund documents that permits cancelling repurchases in the event of a war can be used for the current wars. An SEC official wanted to know  whether the Gottex funds can cancel or amend a repurchase offer at any time in light of the ongoing wars in Iraq and Afghanistan.

A Gottex  administrator replied that the manager does not view these wars as material for the funds and hence would not cancel repurchases.

For the Gottex funds in question, repurchases are the main way for customers to liquidate their investment. Hence restrictions on repurchases matter a lot. Not being able to tender the interest means the investment becomes less liquid. Possibly some investor raised this issue with regulators, which led to the SEC questions to Gottex.

Many funds of funds did not honor redemption requests in the 2008 crisis, leaving investors in the lurch. To top it off, a significant number were found to have channeled their clients’ money to Bernard Madoff. Funds of funds as a whole have not recovered from that. Investors became wary and assets declined.

Regulators’ attention to FoFs may or may not reflect a new long-term policy. The SEC itself is going through a change of senior management amid a dramatic scandal stemming from a lawsuit filed by David Weber, former assistant inspector general for investigations at the SEC watchdog.

The latest announcement is the coming departure of enforcement chief Robert Khuzami, who had previously been mentioned as a possible replacement  for newly departed SEC chair Mary  Schapiro.

Mr. Weber alleged that SEC personnel allowed hackers access to key information about the computer network infrastructure of the NYSE, NASDAQ and other exchanges, among other claims.

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