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FSA Warns Hedge Fund Managers Over Market Abuse 'Complacency'

by Robert Lee, Tax-News.com, London

31 October 2007

The FSA has issued a report voicing its concern over a growth in "market abuse" within the financial services sector, and a seeming 'complacency' within the hedge fund sector with regard to controls to prevent this.

The report was compiled after FSA officials visited a cross section of hedge fund managers (HFMs), to review the controls they had in place to mitigate the risk of market abuse.

Findings revealed that some HFMs had a high level of awareness and appropriate controls in place, while others were less aware, had fewer controls and demonstrated a complacent attitude to the risks.

The FSA has expressed 'disappointment' over some aspects of its findings, and revealed that follow-up visits and a wider examination would be taking place in the next few months.

In the meantime, the FSA has set out its views on the sorts of measures which HFMs should be taking in order to gain control over the situation.

Some of the suggestions made by the FSA include:

  • Making sure that firms recognise that ultimate responsibility for compliance with the market abuse regime lies with senior management. They should demonstrate this through both the culture and the controls found within the HFM.
  • Emphasising that all staff within HFMs have a role in combating market abuse and should be aware of the part that they can play.
  • Making it essential that all HFMs, whatever their size, have in place some independent monitoring of their market abuse controls and procedures. They could undertake this monitoring in-house or use an external resource.
  • Ensuring that all staff operating within HFMs receive appropriate and regular training on market abuse.

The FSA also highlighted that one of the major risks to which HFMs are exposed is trading on the basis of inside information. It therefore suggested that HFMs maintain a list of all securities on which the HFM has received inside information and in which, in consequence, trading is restricted.

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