Compliance Avenue

News from other other side of the globe …

Not to long after the SEC announced its new regulations on short sales, we have learned that the Securities and Futures Commission of Hong Kong (the “SFC”) that it will be introducing a short-position reporting regime to enhance transparency of short selling activities in Hong Kong.   There is little doubt that this stems from industry feedback and the SFC’s view of the current domestic market situation.

The SFC’s CEO, Mr. Martin Wheatley, claims that the “build-up of large short positions may be potentially disruptive to market stability” and that this “short-position reporting regime will not only complement Hong Kong’s robust short-selling regulatory framework but will also provide a more complete picture of short-selling activities in our market.”

Under the proposed regime, the reporting obligation will be triggered if a short position is equal to or exceeds, 0.02% of the issued share capital of a listed company, or a market value of $30 million, whichever is lower. Weekly reports must be submitted to the SFC until the short position falls below both trigger levels. The SFC will publish aggregated short positions of each stock on an anonymous basis a week later.

Managers should particulary note that only the constituent stocks of the Hang Seng Index, the H-shares Index, financial stocks and other stocks specified by the SFC will come under this new reporting regime.  Derivatives will not be included.

On February 24, 2010, the SEC announced the adoption of a new short selling price restriction rule, and the final text of the new rule was officially released on February 26.  The rule will amend Regulation SHO under the Securities Exchange Act of 1934 by adopting a short sale “circuit breaker” that will be triggered any time a stock experiences a price decline of at least 10% in one day.  Once triggered, short selling in the stock will only be permitted at prices above the current national best bid.

This post summarizes the basic elements of the new rule, which represents the first short sale price restriction adopted by the SEC since it eliminated the former “uptick rule” in 2007.

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As SEC chairman, Schapiro pledged to quickly pursue new limits on short selling. In April, just two months after she took the job, the agency unveiled a proposal to crack down on the practice.

But more than a year after Schapiro took office, the SEC has not yet written into the Wall Street rulebook the short-selling limits — or most of the other measures that the agency has proposed to more tightly regulate the financial system. According to the Washington Post, whether Schapiro can achieve more of her reform agenda will be a test of how much she can change the SEC, which gained a reputation as a weak Wall Street regulator in the years leading up to the financial crisis………

According to a report from the Financial Times, Paulson & Co, a hedge fund that made billions of dollars betting against subprime mortgages, has received a request for information from the Securities and Exchange Commission in connection with an investigation into complex securities at the heart of the financial crisis, according to people familiar with the matter. In the months prior to the real estate crash, which pre-empted the global economic volatility, the company made $15 billion from investments in subprime deals.

For all of the SEC registered investment advisers out there, don’t forget that your annual ADV Part 1 update filing is due at the end of march (90 days after fiscal year end).  Update filings are made via the IARD system and AUM-based filing fees will be required this year.

While you’re thinking about Form ADV’s, don’t forget that some states require that you submit a copy of your ADV Part II to them (if you have made a notice filing in that state).  For example, New York State requires that advisers who have made notice filings to the state must submit a copy of their ADV Part II to the NYS Dept. of Law.  An updated copy of Part II must also be offered to your investors and advisory clients once a year.

Touching on a subject that we discussed back in August, FINRA has issued an advisory note stating that brokers must monitor their employees’ activity on social networking sites.  According to the Bloomberg article:

Firms that archive client communications including e-mails need to adopt similar policies for social networking sites and may use software to automatically log brokers’ Web messages…

With the proliferation of social networking sites and the privacy restrictions that most users utilize, it is difficult to imagine how brokers can possibly hope to monitor or record their employees activities on those sites.  The best they can hope for is to issue policies prohibiting the use of social networking sites for business.  As discussed in our earlier article on the subject, this is eventually going to become an issue for hedge funds and RIA’s as well.  Will the SEC eventually issue similar guidance?

The Securities and Exchange Commission is shaking up its enforcement division, establishing five priority areas, including one pointed directly at hedge funds and private equity firms.

Read more here

On December 16th, the SEC announced in a press release that they have approved certain amendments to the Advisers Act custody rule (Rule 206(4)-2). Amendments to this rule were originally proposed in May 2009. The final rule was released on December 20, 2009 and incorporates many of the amendments proposed in May, but also contains several modifications to the May 2009 proposal particularly with respect to the impact on advisers to pooled investment vehicles.

The Release actually makes a number of specific suggestions for additional compliance procedures that should be considered.

A few highlights of the final rule amendments include:

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Reg S-P has been mentioned quite frequently on this site. In March 2008, the SEC released a set of proposed amendments to Regulation S-P which seek to require registered investment advisers to enhance the protection of consumer financial information. If adopted, the proposed amendments would require advisers to expand existing safeguards into a more expansive “information security program”.

HedgeOp Compliance CEO, Bill Mulligan conducted a webinar on these proposed changes, specifically focusing on: helping investment adviser’s understand the expanded requirements under the proposal and discussing the hot button topics such as: (i) the identification of reasonably foreseeable risks at your firm; (ii) designing information safeguards to control/manage the identified risks; (iii) setting up a plan for testing and training for staff; (iv) evaluating the programs of your service providers; and (v) developing and reviewing your procedures related to unauthorized access of confidential data.

You can view a video recording of this webinar and download the presentation materials below.

Download webinar presentation

One year ago today, Bernard Madoff was arrested and charged with securities fraud in a $50 billion Ponzi scheme that affected thousands of investors.   It was an investment scandal that rocked Wall Street and raised concerns and awareness on all levels.  As a result, stricter regulations and much needed reforms and due diligence on how the Securities and Exchange Commission intends to respond to and review allegations of fraud have been implemented.

Briefly stated those reforms include:

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