Registered investment companies that pursue alternative investment strategies (also referred to as "liquid alts") are a relatively new form of offering for investment managers accustomed to operating private investment funds. Unlike a private fund, which invests without restrictions, the Investment Company Act of 1940 (the 1940 Act) extensively regulates the governance and operations of a liquid alt and imposes restrictions and limitations on its investment activities. In addition, because liquid alts are a relatively new product, retail investors may not fully understand the nature and potential risks of an investment in liquid alts. Nonetheless, liquid alts have experienced significant growth since their introduction. The Wall Street Journal reported that liquid alts have burgeoned from about $38 billion in assets in 172 funds in 2008 to $160 billion in assets in 429 funds in 2014. However, the Securities and Exchange Commission (SEC) has estimated the assets in liquid alts to be in excess of $300 billion as of May 2014. In any respect, liquid alts are the fastest growing sub-category of mutual funds, receiving $40.7 billion in investor funds in 2013. This growth has occurred amidst a net reduction in assets for actively managed domestic equity mutual funds, which lost $575 billion from 2007 to 2013.

This rapid growth has engendered growing regulatory focus. In its Examination Priorities for 2014, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced that its National Exam Program will include, among other things, a concentrated review of liquid alts focusing on: (i) their leverage, liquidity and valuation policies and practices; (ii) the staffing, funding and empowerment of their boards, compliance personnel and back-offices; and (iii) their marketing to investors, including the representations and recommendations made to investors concerning the suitability of the investment. In January, OCIE also announced its intention to conduct a coordinated review, or sweep, of liquid alts and their investment advisers. OCIE's initial review, which Division of Investment Management Director Norm Champ recently said is likely to begin this summer or fall, is expected to cover up to 25 alternative investment companies, or approximately 14 percent of the 185 liquid alt fund families currently in operation. Based on the results of its initial review, OCIE will decide whether to conduct a second sweep. One commentator has noted that this sweep on liquid alts reflects how "keen" the SEC is "to shift from reactionary regulation (for which the agency was criticized after the 2008 crisis) to proactive oversight."