SEC's OCIE is conducting a sweep investigation into investment advisory firms that channel investors’ money into hedge funds, The Wall Street Journal reported.  According to the WSJournal's Jenny Strasburg, they're looking into whether these firms are earning their "finder's fees" - i.e., properly overseeing client money and dealing with potential conflicts of interest.  Currently, about a dozen IA firms are being questioned - but there could be more - making it one of the SEC's broadest examinations ever of funds of hedge funds and advisers specializing in hedge funds. 

The sweep by the SEC's Office of Compliance Inspections and Examinations also may include alternative-investment advisers focused on private equity and other registered advisers catering to pension funds.  The agency's initial scrutiny reportedly involved firms overseeing $100 million to $15 billion in assets. 

    Funds of Hedge Funds.    In exchange for fees typically ranging from 1% to 2%, these financial firms allocate the funds of institutions and wealthy individuals among a portfolio of hedge-fund managers.  Clients pay additional fees to the underlying hedge funds.  Such investment strategies were high-flying until 2008, when hedge funds suffered steep losses along with the overall market.  Numerous funds of hedge funds lost client money in the collapse of the Ponzi schemes, such as the one operated by Bernard Madoff.  This year, some of the biggest funds of funds have attracted new client money, while many smaller firms are struggling.

   Sweep Exam Scopes Include.   SEC staffers are requesting the names of hedge funds that advisers considered but then rejected, as well as the reasons why those funds were not chosen.  This can result in quite a broad list because, as the Journal notes, advisers typically reject more hedge funds than they hire.  In effect, the SEC will obtain knowledge about hundreds of hedge-funds that are not subject to SEC oversight.  SEC officials also want to know the names of all consultants and outside advisers that helped choose or reject managers, and how much they got paid.

The SEC reportedly also is looking into the personal accounts of advisory-firm executives and other accounts not available to outside clients, on the chance they might uncover front-running, or trading ahead of client orders, or the taking of adverse positions.  The SEC recently asked for dates and amounts of all client withdrawals, details of any revenue-sharing agreements, and a "trade blotter" of asset purchases and sales for current and former clients, as well as for advisory-firm and executive accounts.  

C-I will look further into this sweep.  [WSJournal, 9/10].