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- FSA attacks ‘complacent’ attitudes towards market abuse found at some hedge funds
- Announces programme of visits to hedge fund managers
- Recommends specific measures for managing market abuse risks
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In a clear warning to the industry, the FSA’s markets division announced last month it would be launching a programme of visits to hedge funds to “formally assess” their market abuse controls. Revealing its plans in a newsletter, the FSA said its first impressions of hedge funds’ compliance regimes were very mixed: whereas some had a “high level of awareness and compliance controls in place,” others were “less aware” and “demonstrated a complacent attitude. Overall, it described itself as “disappointed” by some of the practices it saw.
The FSA stressed that ultimate responsibility for compliance rests with senior management not the compliance team (either internal staff or external consultants), which was not the impression to it given by some hedge fund managers during initial visits.
It also set out a series of measures it believes hedge funds should be taking to manage market abuse risks, including:
Compliance responsibility:All staff within hedge fund managers (HFMs) should be made aware of the role they have to play in identifying market abuse.
Systems and controls: The FSA encourages all HFMs to have in-built controls in their computer systems that flag up restricted securities when trading.
Monitoring: All HFMs irrespective of size should have independent monitoring in place, either in-house or external.
Training: It is the responsibility of senior management to ensure that all staff are adequately trained. Currently, some training is non-existent.
Restricted/stop lists and Chinese walls: The FSA expects all HFMs to maintain a list of securities on which they have received inside information and ensure trading in these securities is restricted. In addition, the FSA recommends that one person only rather than a group of individuals should be responsible for maintaining this list and be accountable for all inside information received by the organisation.
Dissemination of information/rumours: The FSA warns that it “will take action” where it can identify “the deliberate leakage of information or the dissemination of rumours”.
Remuneration structures: The FSA recommends long-term remuneration structures as one way to “reduce the incentive for staff to undertake market abuse for short-term gain”.
Taped Telephone Lines: All HFMs should consider recording telephone conversations of HFMs, as some do already.
PA dealing procedures: FSA recommends all personal account dealing should be reviewed retrospectively at least once a year.
The FSA also makes it clear is not sympathetic to claims from smaller hedge funds that they lack the resources to hire full-time compliance officers and find it difficult to find “high-quality” external compliance support. It states: “It is not a valid excuse to claim they [hedge fund managers] are not meeting regulatory standards because of inadequate advice.”
For more information, see: FSA Market Watch, Issue 24: Hedge Fund Visits.
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