Editor column

Citation

Davis, H.A. (2009), "Editor column", Journal of Investment Compliance, Vol. 10 No. 3. https://doi.org/10.1108/joic.2009.31310caa.001

Editor column

Article Type: Editor column From: Journal of Investment Compliance, Volume 10, Issue 3

In our comprehensive lead article on hedge fund valuation, Ben Haskin, Joseph Davis and Jocelyn Flynn discuss the recent US Congressional and SEC focus on hedge funds and the inherent difficulties in the valuation of hedge fund assets. In their summary of hedge fund valuation cases, they illustrate the need for shared responsibility in the valuation of hedge fund assets, the dangers of arbitrary valuation and cherry-picking third-party prices, the need for transparent valuation methodologies, a fund’s need to document each step of the valuation process along with reasons supporting each valuation decision, and the importance of not disregarding evidence that illiquid assets have become impaired. The authors discuss the SEC’s allegation against two former Bear Stearns portfolio managers for misleading investors about the financial state of the firm’s two largest hedge funds and their exposure to subprime mortgage-backed securities. They outline lessons learned from other valuation cases, including the need for a chief valuation officer and proper supervision of the valuation process. They discuss the application of SEC Rule 206 (4)-8, the new anti-fraud rule under the Advisers Act, and they review best practices in investor disclosure, including the independence of the valuation function, comprehensive written valuation policies and procedures, and internal controls.

Next Joel Telpner and Jamila Piracci describe the huge number of US Congressional, Obama administration, and financial services industry initiatives currently underway to reform and regulate and market for over-the-counter (OTC) derivatives in the United States. While the status of various legislative and regulatory proposals will continue to change, this article discusses the most important underlying issues and controversies such as those relating to mandatory clearing through central counterparties (CCPs); distinguishing customized from standardized derivatives; potential margin, business conduct, reporting, and record-keeping standards for OTC dealers; and an appropriate regulatory regime for credit default swaps (CDS).

Matt Morley, Jeffrey Maletta, Michael King, Robert Hadley, Matthew Fader, and Brian Saulnier note that FINRA has identified the Foreign Corrupt Practices Act as an examination priority for 2009 and the FSA has recently disciplined one of the world’s largest insurance brokerage firms for failing to train relevant personnel as to bribery and corruption risks; they outline relatively simple and inexpensive compliance measures that any company operating internationally can take to reduce the risk of legal liability under anti-corruption laws. Then Howard Goldstein explains the changes to US federal money laundering and criminal fraud statutes contained in the Fraud Enforcement and Recovery Act of 2009 (FERA), extending the definition of proceeds to include the gross receipts, not just the profits from unlawful activity, revising the definition of a financial institution to include a mortgage lending business, and bringing frauds involving options and futures in commodities under the securities fraud statute. Lauren Blumenthal Kleiman explains how recent Ponzi schemes and other frauds have evidenced the need to reassess the regulations governing the custody of client assets by registered investment advisers (RIAs) and outlines the SEC’s proposed amendments to the investment adviser “custody rule” to provide greater protection to custody clients.

Chris Bates, Carlos Conceicao, Mark Poulton and David Pudge explain changes to the UK Disclosure and Transparency Rules that require an investor in a U.K.-incorporated issuer to disclose not only holdings of voting rights attaching to shares and shares underlying qualifying financial instruments but also holdings in financial instruments that have a similar effect to qualifying financial instruments such as CfDs (contracts for differences). Kevin Hawken and Miles Bake then explain a new Capital Requirements Directive adopted by the European Parliament that, among other things, requires the originators or sponsors of a securitization to retain a net economic interest equal to at least 5 percent of total securitized exposures, to demonstrate to their regulators that they understand the risks and valuations of their securitization positions, and to have detailed performance and monitoring systems in place. Finally, Peter Bibby, Helen Marshall, and Christopher Leonard explain the content, purpose, and likely effects of the European Commission’s draft directive on Alternative International Fund Managers, published in April 2009, which if implemented in its current form would require all entities managing or promoting pooled funds of any kind in the European Union to carry a higher level of capital and provide greater disclosure to regulators.

Our summary of FINRA Regulatory Notices for this issue covers rules on personal securities transactions (09-22), suitability and “know-your-customer” rules (09-25), rules on private placements of securities issued by a member firm or control entity (09-27), an interim SEC pilot program on margin requirements for trading in CDS (09-30), a proposed consolidated FINRA rule governing the distribution and sale of investment company securities (09-34), and FINRA’s recommendation that firms engaged in the municipal securities business review their policies and procedures in light of recent changes to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (EMMA).

Henry A. DavisEditor