The Securities Litigation Expert Blog

SEC Defining Risk as Complex Investments

Posted by Jack Duval

Jun 4, 2014 8:14:00 AM

 It has been widely reported that the SEC has put together a group dedicated to looking into how private equity and hedge funds “value their assets, disclose their fees, and communicate with investors.”[1] What has not been so widely reported is why this new group is necessary.

I believe the SEC is responding to investment complexity with specialized examination groups.  This is straight out of the SEC playbook going back to 2010, when it underwent a complete reorganization.  (See our previous coverage of this here.)


To understand why this is happening now, we have to go back to the passage of the Dodd-Frank Act in 2010, which removed registration exemptions for private equity and hedge funds.  Previously, these funds were covered under the so-called “15 client exemption” which allowed private fund advisers to count each fund as a client and thereby bypass the purview of the SEC.[2]

In testimony to the U.S. House Committee on Financial Services, SEC Chair Mary Jo White provided insight about the SEC’s private fund examination efforts.  Some of the more salient points she made include:[3]

  • Since Dodd-Frank has passed, approximately 1,800 advisers to hedge funds and private equity funds have registered with the SEC for the first time;
  • Staff is currently conducting “focused, risk-based” exams on this pool of new registrants;
  • So far, some of the problem areas that have arisen are as follows: “misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser.”

Focusing on Complex Businesses and Complex Investment Strategies

While the SEC has not publicly defined how it is using its “risk-based exams” it appears it is using complexity as a key determinant of risk.  The result is that the SEC is focusing on funds that have complex businesses and complex investment strategies.[4]

The Complexity of Regulating Complex Investments

How complex is this task?  One indicator is the amount of staff required to carry out the examinations.  As part of the fiscal 2015 budget request, the SEC is looking for funding to add 316 examination staff to its Office of Compliance Inspections and Examinations.[5] This would increase the current 450 examination staff by over 70 percent.[6]

To put the size and scope of their mandate in perspective, the SEC has so far only examined about nine percent of RIA firms.[7] Their goal is to have examined 25 percent of these newly registered advisers by the end of 2014.[8]

As the evolutionary speed of investments continues to increase and change the landscape, the SEC will have to match it with the speed of change in its organizational structure.  This will require great flexibility, creativity, and managerial savvy.


The Accelerant roster of securities experts with complex investment backgrounds includes:  Steve Pomerantz, Ph.D.Tom Boczar, Esq., CFATom Brakke, CFAGerry Guild, CFA, and John Duval, Sr.

To see all of Accelerant's complex securities experts, visit our website here.

[1]                 Reuters. “Exclusive: SEC forms squad to examine private funds – sources”; Available at June 4, 2014.

[2]        “SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act”; Available at ; Accessed June 4, 2014.

[3]        “Testimony on ‘Oversight of the SEC’s Agenda, Operations and FY 2015 Budget Request’”; Available at - .U34-vlhdWht; Accessed June 4, 2014.

[4]                 PE HUB. “Some PE firms chosen for early SEC exams based on risk: Buyouts;” Available at; Accessed June 4, 2014.

[5]                 See Supra note 1.

[6]                 Id.

[7]                 Id.

[8]                 Id.

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Topics: SEC, Complex Investments, hedge funds, private equity

Douglas Engmann Joins Accelerant LLC

Posted by Jack Duval

Feb 7, 2014 10:38:15 AM

Accelerant is pleased to announce the addition of Doug Engmann as a consultant and expert.  Doug has expertise in many aspects of broker-dealer lending, risk management, and oversight, including:

  • Portfolio margin
  • Hedge fund lending
  • Risk management
  • Portfolio liquidation
  • Derivatives and equities trading
  • Portfolio management
  • Clearing firm practices
  • Exchange and industry utility management

Doug is the President of Engmann Options Inc., a San Francisco private investment and securities consulting firm owned by the Engmann brothers, and Chairman of Sage Brokerage Holdings, the parent of a operating broker dealer servicing proprietary trading groups and hedge funds.

Mr. Engmann recently retired as Co-Chairman of Revere Data, LLC - a business intelligence and data company servicing the financial services industry. He was formerly the Senior Executive Vice President and Managing Director of Equities for Newedge USA, LLC (formerly Fimat USA), where he also served on the Fimat USA Executive Committee. Fimat USA had acquired the San Francisco based retail brokerage firm Preferred Trade (founded in 1982) from the Engmann brothers in 2005. At Fimat, he pioneered the use of portfolio margining under the pilot project approved by the SEC in 2005.  Fimat was the leading broker-dealer using portfolio margining for its hedge fund and institutional customers in 2007.

As an active participant in policy matters regarding securities and derivatives trading and processing, he has served:

  • As a board member of the National Securities Clearing Corporation
  • As a board member of the International Securities Clearing Corporation
  • As a board member of the Options Clearing Corporation
  • On the Securities Industry Association’s Options Committee
  • On the Pacific Exchange as a member of the Board of Governors, Vice-Chairman, and Acting Chairman
  • On the Risk Advisory Committee of the New York Portfolio Clearing (a joint venture between DTCC and the New York Stock Exchange

Doug has a Bachelors in Economics from University of California - Berkeley and a Masters in Economics from the Massachusetts Institute of Technology.

Doug will be associated with Accelerant’s New York City office.  Additional information about Doug can be found here.

Accelerant ( is a securities litigation consulting firm specializing in large and complex cases. Our experts have industry, academic, and regulatory experience and bring broad and deep securities and regulatory knowledge as well as analytic rigor to their work.

Accelerant’s clients value our ability to communicate complex ideas simply, our reputation for unbiased, independent, and high quality analysis, and our commitment to a highly responsive work ethic. Headquartered in New York City, Accelerant also serves clients from our Hong Kong and London offices.

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Topics: hedge funds, Securities Expert, portfolio margining, Margin Sales, Doug Engmann, Margin

All About Hedge Funds - Second Edition

Posted by Jack Duval

Feb 22, 2013 1:32:36 AM

Ezra Zask has a new book out "All About Hedge Funds, Fully Revised Second Edition". (AAHF)  I purchased it this morning and it looks like a great primer for anyone needing to understand the industry.

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Topics: Books, investments, Ezra Zask, primer, hedge funds

Dodd-Frank Act Driving Compliance Hiring

Posted by Jack Duval

Dec 28, 2012 2:05:41 AM

Hedge funds and private equity funds are having to build out their compliance capabilities due to new rules under the Dodd-Frank Act, the New York Law Journal reports.  (NLLJ)  The most interesting fact of the article may be this:

In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.

"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.

See our previous coverage of the Dodd-Frank Act here, here, here, and here.
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Topics: Dodd-Frank, Investment Advisors, SEC, Compliance, private equity fund, Dodd-Frank Act, hedge funds, regulation., New York Law Journal

Hedge Fund Variable Annuity Sub-Account Litigation

Posted by Jack Duval

Dec 7, 2012 4:47:13 AM

InvestmentNews is reporting on securities litigation involving variable annuities that offered hedge fund sub accounts.  (IN)

The hedge funds at issue were the Foresee Strategies Insurance Fund and the Foresee Strategies 3(c)(1) Insurance Fund LP, which were related to a group called the SALI Multi-Series Fund LP.  They were sold as part of SunLife variable annuities.

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Topics: FINRA, variable annuities, sub-accounts, litigation, investments, hedge funds

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