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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Article Type: Editor column From: Journal of Investment Compliance, Volume 11, Issue 1
Securities trading techniques continue to evolve with advances in technology and regulators are constantly trying to catch up as they strive to understand those developments and make appropriate adjustments to the rules. One of the interesting developments over the past few years, particularly for large trades, has been the emergence of so-called “dark pools” that allow sellers of large blocks of securities to find interested buyers without displaying their intentions to the market at large. Andre Owens, Soo Yim, Beth Stekler, and Cristie March explain some of the background related to dark pools and a recent US Securities and Exchange Commission proposal to amend the rules related to the use of dark pools without denying the benefits of this technique to traders of large blocks. These amendments come at the same time the SEC is investigating other computer-driven trading techniques such as flash orders, direct or sponsored access, and co-location.
Among the numerous issues related to financial reform legislation currently being debated by the US Congress and the Obama administration are the respective roles of the SEC and the Commodity Futures Trading Commission. Although there are currently no active legislative proposals to merge the two, their respective leaders have recognized the need to explore similarities and differences in approach as well as jurisdictional boundaries. Charles Dropkin summarizes recommendations to harmonize the two agencies’ approaches to the regulation of securities and futures that arose from the agencies joint public meetings in September 2009.
Two other market practices receiving continued SEC attention are short selling and securities lending. Kevin Campion and Arik Hirschfeld provide a useful summary of a two-day roundtable discussion among experts of current issues related to short selling and securities lending that will provide the reader with an understanding of numerous risk, financial, regulatory, and other issues related to those market practices.
In the first of two articles on hedge funds, Jeremy Kosky, Simon James, and Helen Carty note that the majority of hedge funds generally do not solicit investment from the general public and are therefore not subject to rules on prospectus liability, but that funds of funds targeted at retail customers need to take particular care that information contained in their prospectuses is complete and accurate. The authors discuss how to protect from liabilities that can arise from misrepresentation. Then, following an article in Volume 10 Number 2 proposing a hedge fund information depository to protect investors against hedge fund fraud, Majed Muhtaseb illustrates the consequences of hedge funds not having properly functioning compliance functions by providing detailed case histories of four well known hedge fund frauds, including numerous red flags that should have been heeded a year and even several years before investors lost hundreds of millions of dollars.
Next Beth Alter explains the importance of trademark registration for hedge funds and mutual funds, pointing out that a fund manager with valid trademark rights can prevent third parties from using the same or a similar mark and prevent the public from being confused between two or more funds with similar names or marks.
Moving to the international arena, Alan Kartashkin, Maxim Kuleshov, and Yulia Sazykina explain new regulations published by the Federal Service for Financial Markets of the Russian Federation that reduce the number of shares that Russian private issuers making initial public offerings can make available for trading abroad in the form of depository receipts. Then Martin Rogers, Mark Shipman, James Walker, Paget Dare Bryan, and Charlotte Robins summarize a consultation paper issued by the Hong Kong Securities and Futures Commission that contains proposals to enhance protection for the investing public in light of losses retail investors suffered from the Lehman minibond affair and other problems during the financial crisis. Proposed measures relate to disclosure, product transparency, and suitability of investment instruments for investors.
Finally, the editor summarizes several notices published in the September to November 2009 period by the Financial Industry Regulatory Authority (FINRA) on reporting transactions in Agency Debt Securities in the Trade Reporting and Compliance Engine (TRACE), best execution in cases when a third party is interposed between a firm and the best available market, and the information on regulatory actions against brokers that FINRA makes available through BrokerCheck. Three recent disciplinary actions are also summarized.
Henry A. DavisEditor