Editor column

Citation

Davis, H.A. (2007), "Editor column", Journal of Investment Compliance, Vol. 8 No. 3. https://doi.org/10.1108/joic.2007.31308caa.001

Editor column

Among the subjects we cover in this issue are insider trading, cross-border access to stock exchanges and brokers, the Foreign Corrupt Practices Act, the continuing impact of the recent Goldstein decision on hedge fund registration with the US Securities and Exchange Commission (SEC), taxation of offshore hedge fund deferral arrangements, margin trading and securities lending in China, fraudulent traps for unwary retail investors, and the need for investment in compliance and security systems. We start with an article by Brian Ochs of K&L Gates that stresses the need for firms to have not only written policies and procedures to prevent the misuse of material non-public information, but also evidence that those policies and procedures are being vigorously enforced on a continuing basis. Before joining K&L Gates to specialize in securities enforcement matters, broker-dealer regulation, and internal investigations, Mr Ochs spent ten years on the staff of the SEC Enforcement Divison, the last five as Assistant Director. Next we have an article by Edward Ferraro of Sidley Austin that takes us through the SEC’s recent deliberations to develop a regulatory framework to address the increased interest among US investors to gain access to foreign securities exchanges and equally strong interest among foreign investors in access to US exchanges and brokers. Mr Ferraro sees at least the possibility that the commission will develop a rule over the next year to implement substantial aspects of a mutual recognition regime. Market structure and market regulatory issues are Mr Ferraro’s specialty. He participated in the parallel market structure developments in the European Union culminating in adoption of the market abuse directive (MAD) and markets in financial instruments directive (MiFID) and related implementing measures. Next, Betty Santangelo (member of this journal’s Editorial Advisory Board), Gary Stein, and Margaret Jacobs of Schulte, Roth & Zabel, authors of past anti-money laundering articles for this journal, provide us with a comprehensive history of the Foreign Corrupt Practices Act along with detailed descriptions of recent cases, including significant prison terms for some violators but also cases where companies were treated leniently by the SEC and the Department of Justice (DOJ) because they took prompt remedial measures after discovering employee wrongdoing. The authors have observed a sharp increase in enforcement of the FCPA by the SEC and DOJ over the past five years. Then Steven Machtinger of Bingham McCutchen describes how the recent Goldstein decision, vacating the requirement that hedge fund managers register with the SEC, has limited the SEC’s ability institute administrative cease-and-desist orders against hedge fund managers for providing misleading information to investors because investors cannot be considered clients of those managers. This problem led the commission in July to adopt a new anti-fraud rule that bars hedge funds from lying about investment strategies, performance, a manager’s experience, and the risk of putting money in a fund. Still, Mr Machtinger notes that the SEC will have fewer opportunities to discover fraudulent statements by hedge fund managers because fewer of them will be registered and have their records available for inspection by the commission. Mr Machtinger, a former senior vice president and associate general counsel at J.P. Morgan Chase & Co. and former SEC staff member, represents and advises broker-dealers and other financial institutions on securities litigation, compliance, and regulatory enforcement matters. Elizabeth Shea Fries, Adrienne Scerbak, Marian Tse, and Scott Webster of Goodwin Procter discuss the final regulations adopted by the US Treasury Department and IRS with respect to Section 409A of the Internal Revenue Code and their effect on offshore hedge fund deferral arrangements. They note that deferral arrangements must comply with the technical provisions of Section 409A to avoid the severe combination of current taxation, a 20 percnet penalty tax, and interest. Ms Fries has particular expertise in innovative investment products, hedge funds and other alternative investments, financial services merger and acquisition transactions, fiduciary issues, and compliance matters. Ms Scerbak has considerable experience negotiating the executive compensation and benefits aspects of mergers and acquisitions for both public and private clients. She advises fund clients with regard to fund formation efforts involving the Title I aspects of ERISA, and has counseled clients on employment agreements, severance plans, and benefit plans in chapter 11 reorganizations. Next, as part of a series on the development of securities law in China, TieCheng Yang and Lucas Wang of Clifford Chance describe a trial program in which certain selected investment companies are allowed to engage in margin trading and securities lending. Clifford Chance has offices in Beijing, Shanghai, and Hong Kong. The firm’s financial services practice in China includes banking and finance, capital markets, funds, insurance, and private equity. Then Joe Borg, President of the North American Securities Administrators Association and Director of the Alabama Securities Commission reminds us that the underlying purpose of most rules that govern investment companies is protection of the investor and that all investment company staff members must keep investors’ interests in mind. In that respect, he describes what NASAA currently considers the top ten fraudulent traps that threaten unwary investors. Murray Mazer of Lumigent then illustrates some of the significant direct and indirect costs many well-known companies have incurred as a result of database intrusions and data thefts and reminds us of the importance of making the necessary investment in technology security solutions. Lumigent develops integrated solutions for database security, security policy management, and data auditing. Finally, we have excerpts from recent NASD actions compiled by the editor covering frequently asked NASD financial and operational questions, recent enforcement measures under the USA PATRIOT Act, trading ahead of customer limit orders, trade reporting requirements under Regulation NMS, reporting consolidated short interest positions, regulation of private placements, trade reporting for foreign securities and American Depositary Receipts, and mark-ups of debt securities. While in all cases the reader is referred for more detail and interpretation to the NASD staff and web site (www.nasd.com), this summary is intended as a useful digest covering the highlights of recent NASD regulatory actions and trends.

Henry A. Davis Editor

James A. Tricarico Jr Consulting Editor