Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Our continuing objective with the Journal of Investment Compliance is to present analysis by specialized lawyers and other experts on current regulatory and compliance developments and issues relevant to broker-dealers, investment advisers, hedge funds, mutual funds, and other types of investment companies, supplementing that analysis with a summary of selected regulatory notices and disciplinary actions by the Financial Industry Regulatory Authority (FINRA).
We start with an article on a highly visible case currently before the US Supreme Court concerning the concept of “scheme liability,” which relates to whether or not third parties such as investment banking firms, accounting firms, and lawyers can be held liable for a company’s fraudulent statements if those third parties did not themselves make those fraudulent statements. Andrew Edison’s analysis and prognostication will be valuable regardless of the actual position the Supreme Court takes in its final decision. Next we have three articles on recent policy directions of the UK Financial Services Authority (FSA). Duncan Black, Angelo Lercera, Joe Smallhoover, and Paul Huey-Burns compare the FSA’s current “principles-based” approach to insider trading regulation and enforcement with current approaches in Germany, France, and the USA. They observe that the prosecution of insider-trading is one of the best examples of principles-based regulation in the USA and question whether the FSA has the will to pursue a more vigorous enforcement regime. Then Carlos Conceicao and Rosalind Gray address two recent decisions by the UK Information Commissioner that call into question whether the FSA can refuse to disclose the names of firms it investigates or censures, even privately and informally, and whether the FSA could be forced to disclose its views of firms as expressed in its supervisors’ reports – and going beyond those two decisions, they note that the FSA is already thinking about publishing more about what it knows or thinks about the firms it regulates. Then David Rouch, Joanna Benjamin, Michael Raffan, Mark Kalderon and Simon Orton summarize the FSA’s recent guidance for providers and distributors of retail structured products to ensure the fair treatment of customers. Here again the approach is principles-based. Both providers and distributors are encouraged to go beyond detailed rules and contractual provisions and make sure that their staffs understand the products, ensure thorough documentation, and provide appropriate risk warnings to end investors. Then, in one more article addressing the UK, Dana Ward discusses the main conditions a UK hedge fund manager must meet to benefit from the Investment Manager Exemption (IME), an issue of growing importance given the exponential growth of hedge fund activity and the magnitude of trading conducted in the UK on behalf of offshore funds. Next, Charles Gittleman and Russell Sacks describe the US Securities and Exchange Commission’s (SEC’s) amendments to Rule 105, which was originally designed to prohibit “covering” short sales that have taken place during a restricted period with securities acquired in a public offering, and now has been broadened to eliminate the term “cover” and prohibit purchasing securities in a public offering where a short sales has been made during the restricted period. There are exceptions for “bona fide” purchases, “separate accounts,” and investment companies. Recently, the North American Securities Administrators Association compiled data gathered from recent investment adviser examinations to identify common deficiencies among advisers and help advisers gain a better understanding of compliance challenge. NASAA’s article summarizes those data and recommends best practices for advisers as they develop compliance practice and procedures. Then Jeff Levering discusses problems that can arise from missing and/or bad mutual fund data, including the mishandling of “breakpoints,” and recommends a list of questions mutual fund managers should ask to assess the accuracy of their data. We conclude with a summary of recent selected FINRA Regulatory Notices and provide a few selected examples of recent enforcement actions. Reg Notice 07-54 is concerned with avoiding conflicts of interest and ensuring the objectivity of fairness opinions. Reg Notice 07-55 provides guidance on conducting background investigations of prospective personnel. Reg Notice 07-57 clarifies certain issues related to the representation of parties in arbitration and mediation cases. Reg Notice 07-59 lays out a principles-based approach to the supervision of electronic communications. Reg Notice 07-61 exempts certain Derivative Related Transactions from TRACE reporting. Reg Notice 07-65 eliminates the requirement on statements of accounts to customers to include the name of the securities market on which a transaction is effected, a reflection of member firms’ existing best execution and disclosure requirements, the frequent rerouting of transactions to different markets to fulfill the requirements of the Order Protection Rule under Reg NMS, and the operational difficulties of capturing the information following the adoption of Reg NMS.
Henry A. DavisEditorJames A.Tricarico JrConsulting Editor