Cayman fund managers respond to SEC proposals

Date: Tuesday, July 7, 2009
Author: Caribbean NetNews

Hedge fund experts in the Cayman Islands have reacted favourably to last week’s proposals by the Inspector General of the US Securities and Exchange Commission (SEC) to increase fund regulation.

The SEC has proposed that regulation of hedge funds and other investment advisors should be tightened in the wake of the SEC’s failure to stop Bernard Madoff’s $65 billion Ponzi scheme.

Don Seymour, former Head of the Investment Services Division of the Cayman Islands Monetary Authority (CIMA) and Managing Director of dms Management Ltd, said, “These are meaningful suggestions that are worth consideration. If implemented, they would both enhance protections to investors and respect the privacy of private investment funds, in stark contrast to recent disclosure proposals put forward locally by individuals that do not address systemic risks and betray the private nature of investment funds.”

Among the recommendations by SEC Inspector General David Kotz is to mandate that hedge funds and investment advisers use an “independent custodian” to maintain investments in separate accounts, like mutual funds are required to do now.

“This custodian requirement essentially removes the ability of an investment adviser to fraudulently use the proceeds invested by new investors to make payments to old investors,” Kotz said in his letter to US Representative Paul Kanjorski, Democratic Chairman of a subcommittee on capital markets.

A second recommendation would require hedge funds and investment advisors to pledge that they conducted due diligence on their advice, much like chief executives are now required to certify their financial reports, or face criminal prosecution.

A third recommendation is for the SEC to extend its so-called bounty programme that gives incentives to company whistle-blowers to report violations of federal securities laws. The programme currently only applies to insider trading.

The last recommendation is to embolden the Public Company Accounting Oversight Board, the US auditing watchdog agency established after the Enron scandal earlier in the decade, with new authority to audit reports prepared by domestic and foreign accounting firms.

The Cayman Islands already requires all private hedge funds registered in Cayman to have an annual audit performed by an auditor approved by CIMA.