Today's Wall Street Journal includes a story about the SEC's new focus on private fund investment advisers' expenses. The agency is said to be looking into whether advisers to hedge funds and other private funds are disclosing to investors all the types of expenses they are charging to funds. Are investors being told that their fund is paying for first-class air travel and fancy meals? Hedge fund adviser expenses are attracting the SEC's interest now because Dodd-Frank subjected private fund advisers to SEC registration and routine examination.
SEC staff examiners are undoubtedly having fun with the project and compiling some great stories of unusual adviser expenses. Nevertheless, the agency ought to think carefully about the expenses it is incurring in conducting these exams. After all, according to an SEC staff report, the SEC examined less than ten percent of registered investment advisers in 2010, which was before Dodd-Frank's private fund adviser mandate took effect. SEC examiners should be looking at funds that cater to retail investors, not those that serve wealthy investors--the only investors permitted by law to invest in hedge funds. Those investors can afford to hire experts to help them figure out how and where to invest their money. As pointed out to the Journal by the director of hedge fund research for one asset manager--"At the end of the day, it's my job to ask the right questions." The SEC should concentrate on more important tasks and let private market discipline handle hedge fund advisers' golf outings.