COURT TELLS SEC TO LEAVE HEDGE FUNDS ALONE: The U.S. Court of Appeals for the District of Columbia Circuit has dealt a blow to the Securities and Exchange Commission's plans to more closely regulate hedge funds. The court ruled unanimously in late June that the SEC had overstepped its authority in defining hedge fund investors as "clients" of a fund manager, and subsequently ordering any manager with 15 investors or more to register with the agency.SEC Chairman Christopher Cox said that he hasn't yet decided whether or not the decision will be appealed. In a statement, he said that he had already instructed SEC staff to evaluate the court's decision, as well as to provide a set of alternatives for the commission's consideration. "The SEC takes seriously its responsibility to make rules in accordance with our governing laws," Cox said. "The court's finding that, despite the commission's investor protection objective, its rule is arbitrary and in violation of law requires that going forward we re-evaluate the agency's approach to hedge fund activity."
Hedge funds are still treated like any other investor in determining whether they have violated basic securities laws, like insider trading, but hedge fund managers have said that they have acted responsibly and should not be subjected to the regulatory burdens faced by mutual funds.
The SEC hedge fund rule was originally adopted in December 2004, in a close vote under Cox's predecessor, William Donaldson. Nearly 1,000 fund managers registered with the commission by the deadline of Feb. 1, 2006. Those managers could now choose to de-register. The rule had also allowed the SEC to periodically inspect the records of a hedge fund.
The SEC is also seeking comment on another beleaguered rule passed under Donaldson in a close vote, which had required that at least 75 percent of directors, including the chairman, of mutual fund boards be independent from the sponsor.
AFA FINANCIAL NAMES ROSS AS CFO: Financial services broker/dealer AFA Financial Group LLC named Bruce M. Ross as its chief financial officer.
In his new role, Ross, a CPA, will be responsible for supervising accounting, finance, human resources, payroll, accounts payable, risk management and tax. As CFO, he will interact with other members of the senior management team to help establish company goals and provide strategic planning. He will also deal with many of the day-to-day issues, such as internal control review, external auditing, budgeting, forecasts, internal control review and modifications, policy and procedure updates, IT improvements, banking, and cost containment.
Calabasas, Calif.-based AFA provides a range of diversified investments and access to securities-licensed financial planners, representatives and CPAs.
MORGAN STANLEY AGREES TO $10 MILLION SETTLEMENT: Financial services giant Morgan Stanley agreed to pay $10 million to settle charges that it failed to stop the use of insider information. "Morgan Stanley failed to conduct any surveillance of a massive number of employee accounts held at the firm, and trading in certain securities in those and other accounts," the U.S. Securities and Exchange Commission said.
The regulator charged Morgan Stanley with a "systematic breakdown" in monitoring accounts and securities trading to detect insider trading, the SEC said.
The SEC statement detailed five violations, dating back to 1997. Morgan Stanley's specific failures included:
* From 2000 through 2004, the company failed to conduct any watch-list surveillance of hundreds of thousands of employee and employee-related accounts to determine whether securities in those accounts had been purchased or sold on the basis of material nonpublic information. Morgan Stanley places issuers on its watch list principally when the firm has inside information relating to that company.
* From 1999 to 2003, Morgan Stanley failed to conduct any daily watch-list surveillance of trading in any accounts with respect to some or all of the securities of approximately 3,000 issuers that had been placed on the firm's watch list specifically so that trading in those securities would be monitored.
* From as early as 1997 until 2005, Morgan Stanley failed to conduct any surveillance of trading in approximately 900 employee accounts held outside of Morgan Stanley, and approximately 30,000 employee accounts held at Morgan Stanley that the firm failed to identify as held by employees.
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