The Technical Committee of the International Organization of Securities Commissions ("IOSCO") published on March 19 a consultation report (the "Hedge Fund Report") that offers detailed recommendations for global regulation of hedge funds.
The Hedge Fund Report solicits comments on the following key recommendations:
- Requiring prime brokers and banks, which are already regulated entities in all jurisdictions, to disclose to securities regulators certain information about their most "systemically significant" or "higher risk" hedge fund counterparties;
- Requiring the registration and supervision of hedge fund managers, including the mandatory disclosure to regulators of information required to protect investors and to monitor system risk, with a focus on "systemically important" or "higher risk" managers, with a possible de-minimis cutoff; and
- Imposing certain ongoing requirements on hedge fund managers, including risk monitoring and compliance functions, verification of fund valuation (according to principles proposed in a previous IOSCO report), increased protection of client fund assets, independent audits, minimum capital requirements, better management of conflicts of interests, and certain disclosures to regulators and investors.
The Hedge Fund Report also raises the issue of possible regulation at the underlying hedge fund level.
IOSCO has presented its findings to the G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency, in preparation for the meeting by G-20 national leaders in London on April 2. Comments to the Hedge Fund Report will be accepted until April 30.
In addition, the IOSCO Task Force on Short Selling published a consultation report (the "Short Selling Report") designed to help develop a more consistent international approach to the regulation of short selling. The Short Selling Report recommends that regulation of short selling should be based on four principles:
- Appropriate controls to reduce or minimize potential systemic risks, including at a minimum, strict settlement (such as compulsory buy-in) of failed trades;
- A regime of timely reporting to the market or to market authorities;
- An effective compliance and enforcement system, including mechanisms for flagging systemically significant and abusive transactions and for cross-border information sharing; and
- Appropriate exceptions for market-efficient transactions.
The Alternative Investment Management Association ("AIMA") published a statement calling the IOSCO Short Selling Report "admirably sensible," particularly in its recognition of the benefits of a flexible regulatory approach to allow market efficient transactions.
It should be noted that many countries have already implemented restrictions on naked short selling and enhanced reporting requirements for short sales. AIMA also supports IOSCO's call for a consistent international approach to short selling regulation. Responses to the Short Selling Report are due by May 4.
Given recent comments by Mary Schapiro, the Chair of the U.S. Securities and Exchange Commission (the "SEC"), we expect that the SEC will likely reinstate the "uptick rule," which allows stock to be sold short only after a rise from its immediately prior price (see related story "Exchanges propose modified uptick rule for SEC to consider in short selling meeting" below).
HEDGE FUND REPORT: available here (PDF)
SHORT SELLING REPORT: available here (PDF)
AIMA STATEMENT: available here (HTML)