Regulators' interest in how hedge funds operate hasn't abated now that a few mutual fund companies have settled. Today, the SEC announced that it is requesting information from from brokerage firms concerning how they help hedge funds recruit new investors, the Wall Street Journal reports.

In particular, regulators are zoning in on the industry's version of a matchmaking service known as "capital introduction", where Wall Street firms introduce investors in their hedge fund clients to managers of new mutual funds.

Normally, if a securities firm makes an introduction that results in new investments, the hedge fund will compensate the firm by sending trading business its way.

Sources told the WSJ that the SEC is probing whether there an inherent conflict in a firm's recommending hedge-fund investments because it will result in lucrative commission revenue, rather than because they are the best funds for investors.

The issue came up during an SEC round table on hedge funds last May. But, many of the investment firm executives in attendance said the information sessions they hold for investors on hedge funds is not to promote them. And, investors who attended such sessions were required to sign carefully worded statement saying they understood this point.

Richard Lindsey, president of Bear Stearns Securities Corp. said during the roundtable, "We provide the venue where managers meet investors. We make it abundantly clear that we are not a placement agent."

 

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