July 11, 2006

FSA Tastes Success Where SEC Fails

Why is the Financial Services Authority (FSA), the markets regulator in the UK, more successful at what it does than the Securities Exchange Commission (SEC)? There are a great many perceived reasons and here are just a few:

  • The FSA looks to enhance market confidence and public awareness, protect consumers and reduce financial crime by searching for the root of the problems in the funds industry and fixing them. In contrast, there are grumbles that the SEC focuses only on cracking down on the hedge fund industry by charging and imposing fines on managers.
  • Authorization is mandatory for any hedge fund manager in the UK. The SEC, which also enforced the same rule, ran afoul of the industry when it relaxed it for a few funds.
  • The authorization process is between two and six months long, and the hedge fund has to deposit its 13-week expense amount as regulatory capital. The SEC has no such requirements.
  • The authorization process entails a regulator checking the fund’s business plan and its personnel who are in charge of various functions.
  • The monitoring process does not stop once the fund is authorized. Risk assessments are carried out every quarter for the top five funds, the next 20 on the list are assessed once every 18 months, while the rest are reviewed once every three years. The tests are conducted over a period of one day or one week, depending on the risk profile of the hedge fund being assessed.
  • A typical risk assessment process includes scrutiny of  how illiquid securities are valued, possible occurrence of insider trading, and side pockets.

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