SEC Says Taking "Close Look" at Zombie Funds

U.S. regulators are looking at so-called zombie funds where money managers continue to get paid from investors even though the fund is essentially inactive, a top Securities and Exchange Commission official said on Sunday.

"We are going to take a close look at that and see whether or not there's a problem," Robert Khuzami, the SEC's enforcement director, said on C-Span television.

The funds become inactive when their managers sit on assets that cannot be sold or their valuations are so low that they do not want to sell them.

Khuzami would not comment on whether he expected the SEC to file enforcement cases against such funds, but he highlighted the probe as an example of how the regulator has changed since the Bernard Madoff scandal blackened the SEC's reputation.

"This is a good example of what we are doing differently now," he said.

Under Khuzami and SEC Chairman Mary Schapiro's leadership, the agency has tried to cut the red tape holding up investigations and revamped its enforcement division, in part by setting up specialized squads to tackle top securities fraud.

One of the specialized units focuses on asset management such as hedge funds and has ramped up its expertise by hiring risk managers, portfolio traders and mutual fund operation types.

"We are not waiting for the fund to blow up or the headline to appear. We are in there earlier," Khuzami said.

The SEC enforcement division is looking across all investment advisers to see whether there are aberrations in their performance such as earning returns in excess of competitors using similar investment strategies.

Khuzami stressed that that was not necessarily indicative of wrongdoing, but that it was an example of a fund that would get close scrutiny from the SEC. (Reporting by Rachelle Younglai; Editing by Jan Paschal)