New white paper on fiduciary role under Pension Protection Act of 2006

"Pension Protection Act of 2006: Is an Expanded Fiduciary Role the Right Choice for Financial Professionals," a white paper, has been issued by The Principal Financial Group.

More resources related to the Pension Protection Act of 2006 are available on The Principal's website.

New hedge fund regulations proposed in December 2006

After the SEC's court defeat on hedge fund registration, sources told me that wouldn't end the Commission's efforts to regulate hedge funds.

They were right. The SEC proposed new regulations late in December 2006. They focus on tightening the requirements for status as a qualified investor and protecting the interests of hedge fund investors against fraud, according to a presentation to the Boston Security Analysts Society by George J. Mazin, partner in the law firm of Dechert LLP.

The SEC would tighten the definition of an accredited investor, known in technical terms as an "Accredited Natural Person." The biggest difference between old and new definitions is the requirement for the investor to hold $2.5 million in investments. But there are other, more minor tweaks.

The new definition will impact hedge fund sales and marketing, said Mazin. Likely implications include:

• Organization of fewer 3(c)1 funds
• Conversion or dissolution of existing funds
• End to some existing investors' ability to invest more in hedge funds
• Possible creation of a market for registered fund of funds products
• Disadvantaging of smaller institutions

The SEC's other new regulatory thrust was expressed in anti-fraud Rule 206(4)-8 to make it illegal for hedge funds to engage in business practices that are fraudulent, deceptive or manipulative toward current or prospective investors.

The comment period for the proposed regulation ends March 9. Mazin anticipates the regulations will be issued and take effect in late March or early April, assuming no major issues surface during the comment period.

The new regulations aren't the only regulatory issues for hedge funds to worry about. Mazin also discussed side letters and side pocketing.

To stay current on hedge fund regulation, Mazin recommended Hedgewire Daily News, Hedgeweek, and Alternative Investment News. I noticed at the bottom of his bio, that he frequently lectures or publishes on hedge funds and other securities topics.

Problems that can trip you up with SEC

There's no single topic that trips up investment advisors or mutual fund companies again and again in SEC inspections. At least not in the experience of Michael Garrity, branch chief in the SEC's Boston District Office. He participated in the "Hot Topics for 2006" panel at the Jan. 25 "Financial Services Challenges in the New Year" conference presented by NICSA's East Coast Regional Committee.

Two other speakers ventured their opinions on likeliest hot spots.

"It's typically a new process or an activity that's new to a firm," said Nicholas D'Angelo, director, Pricewaterhouse Coopers LLP.

Stuart Fross, deputy general counsel and SVP, Fidelity Investments, said that your firm is probably in good shape if it is fully disclosing where its income is coming from and where its expenses are flowing.

Panelists focused on five topics:

1. Affiliated transactions (D'Angelo)
   
2. Fair valuation (Elizabeth Duggan, senior director, FT Interactive Data)
   
3. Hedge fund mainstreaming (Robert teDuits, director of offshore and alternative business development)
   
4. Performance fees (Fross)
   
5. Swaps standardization (Marlena Fitts, manager of product management, Advent Corp.)

Garrity commented on his inspection approach to each topic after giving the standard SEC disclaimer that his opinions were strictly his own.

Having policies and procedures is essential. Garrity seemed to mention that after each topical presentation.

Here are some additional areas that Garrity considers, by topic area.

Affiliated transactions
Garrity looks at a list of affiliates before visiting your company. He'll also ask you for a list of affiliates and he'll look at actual transactions.

Fair value
Is your process fair, verifiable and consistent? Do you use multiple pricing sources? Do you test the pricing services themselves?

Hedge funds
Hedge fund advisors are supposed to register with the SEC by February 1. "It used to be that hedge funds were run for rich people in Geneva by rich people in Greenwich," said Garrity. Now that their distribution has broadened, the SEC is more interested. Garrity would look at your investment process, types of investments, leverage (to ensure it's monitored by chief compliance officer), best execution practices, gift issues, derivatives, sideletters, performance fees and high water marks.

Performance fees
Garrity may run through actual payment calculations with you. He also looks at disclosure, allocation of hot IPOs (to see if you're favoring the account with the performance fee), risk.

Swaps
Garrity looks at disclosure and to see that you have a system for monitoring that's commensurate with risk.