Money managers can run afoul of rules if they tell clients one thing and then do something else, such as saying a particular fund will invest in equities that can be easily bought and sold but then loading up on illiquid corporate bonds.

The SEC wants to know whether firms are violating disclosure requirements to place IPO shares in funds that manage money for their senior executives, instead of clients, said two of the people. Additional concerns: Firms are allowing only certain investors to benefit from IPOs or shares are being used to give an immediate pop to laggard funds to keep clients from pulling their money, the people said.

The review is being led out of Chicago by the SEC's Office of Compliance Inspections and Examinations, said one of the people, who like others spoke on the condition of anonymity because the inquiry isn't public. If OCIE finds suspicious conduct, it will often make referrals to the SEC's Enforcement Division, which investigates wrongdoing and can sanction fund managers.

Judy Burns, an SEC spokeswoman, declined to comment.

IPO Abuses

Last year, the SEC brought an enforcement case against London hedge fund manager Tim Leslie for allegedly routing IPO shares to a fund that he had a large personal investment in. Leslie's firm, James Caird Asset Management, oversaw about $2.1 billion, with all but $100 million in a fund that primarily managed money for outside investors.

Leslie's smaller fund was advertised as buying mostly thinly traded distressed assets, not the dozens of IPOs he ended up investing in, the SEC said.

The firm also had given its clients the impression that there would be little overlap between the larger fund they invested in, and the smaller one in which Leslie personally had a big stake. But the SEC said the funds often shared investments, and when they did about one-third of the selected trades went to the smaller fund and two-thirds went to the bigger fund. The practice wasn't disclosed to Leslie's investors, according to the SEC.

Leslie, who had spent much of his career at Louis Bacon's Moore Capital Management, agreed along with his firm to pay more than $2.5 million to settle the SEC's claims without admitting or denying any wrongdoing.

Hoarding Trades

Former SEC Chair Mary Jo White flagged the issue of fund managers rewarding themselves at the expense of their investors in a 2015 speech. She said the agency's examiners had found instances in which hedge funds were running profitable trades through “proprietary funds rather than client accounts in contravention of existing policies and procedures.” She was speaking generally and made no reference to any specific firm.

SEC concerns about IPO abuses aren't new. After the dot-com bust in the early 2000s, the regulator sued multiple money managers for alleged infractions, including stuffing new funds with IPO shares to boost returns without disclosing that those gains were dependent on the newly listed companies.

The SEC examination of how hedge funds dole out stock comes as the regulator's new chairman, Jay Clayton, tries to increase IPOs. He has repeatedly said he wants to make it more appealing for companies to raise money by going public, rather than relying on less-regulated private markets.

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