The initiative is separate from the dozens of cryptocurrency probes, which mainly target companies the SEC suspects of running afoul of securities laws via Initial Coin Offerings (ICO).
While examiners will report any suspicious activity uncovered in the course of their examinations, the main purpose of the initiative is to inform how the commission’s policies should address cryptocurrencies, the source told WSJ.
Marc Elovitz, a partner at Schulte Roth & Zabel LLP, a firm which advises hedge funds, said that, “This is a way for the SEC overall to gather information and learn about important new technology and products.” Examiners conduct these types of operations “to educate the commission overall about new businesses or new industries.”
The operation will begin in the next two months, the source tells WSJ. Examiners will inspect whether the assets bought by fund managers match those which they advertised to investors in disclosure documents. The SEC will also look at the risk disclosures provided to investors and see how thoroughly documents explain the strategy of trading cryptocurrencies or tokens, the source said. The source added that the SEC has identified at least 100 private fund managers whose holdings are focused in crypto.
According to WSJ, hedge funds are most likely to hold cryptocurrencies, but private-equity firms may be examined as well if their funds own digital assets either directly, or through companies linked to the crypto industry.
The SEC directly regulates managers of private funds that oversee at least $150 mln and also has the authority to periodically inspect smaller firms. As many as 84 cryptocurrency hedge funds were launched in 2017.
The reported examination of hedge funds follows a pattern of increase scrutiny by the US financial regulator. Earlier this month, the SEC released a memo informing the crypto community that platforms trading digital assets that fit the definition of a security must be registered with the SEC.