SEC Increasing Scrutiny of Insider Trading at Hedges; Issues Questions to Funds

The Securities and Exchange Commission has sent hedge funds a list of questions they should pose to employees and clients who are privy to information that would constitute insider trading if they were to share it with portfolio managers, the Associated Press reports.

In particular, the SEC is asking hedge funds for a list of all of their employees and clients and any of their relatives who are executives or directors at publicly traded companies.

"This is an effort to look out for potential insider trading at hedge funds and to ensure that hedge fund advisers are living up to their obligation to detect and prevent insider trading," said Mark Schonfeld, director of the SEC's New York regional office.

But hedge funds are taking the request in stride, according to Nora Jordan, a hedge fund attorney at Davis Polk & Wardell. Jordan said she didn't expect it to result in any information. "It would surprise me if they found some big smoking gun on this," she said.

The SEC came under scrutiny last year when one of its former attorneys charged that his superiors had prevented him from investigating insider trading information a prominent Wall Street executive had shared with a hedge fund.

Last month, the Senate issued a report recommending that the SEC establish formal procedures for conducting enforcement investigations.

SEC Examining Funds' Sub-Prime Holdings

The Securities and Exchange Commission has contacted the 25 largest mutual fund companies in the nation to inquire about their holdings of mortgage-backed securities, according to Douglas Scheidt, associate director in the SEC investment management division, Bloomberg reports.

"We have talked to several about whether they are having difficulties in valuing [sub-prime debt and how they are dealing with] significant redemptions," Scheidt said. "If they sell off the more liquid securities to satisfy redemption requests, then the valuation of the remaining portfolio becomes even more critical."

Barry Barbash, former head of the SEC's division of investment management and now a partner with Willkie Farr & Gallagher, explained that if such instruments were overvalued, redemptions were then inflated.

U.S. Treasury Secretary Urges Regulators Not to Overreact to Credit Crisis

U.S. Treasury Secretary Henry Paulson, in Europe to meet with regulators in London and Paris, said they shouldn't necessarily overreact to the credit crisis by imposing additional regulations, Dow Jones reports.

Paulson said the credit crisis and investment firms' lower appetite for risk will eventually pass, and that in the meanwhile, regulators shouldn't impose tighter requirements on financial services firms because that could stunt innovation.

"There is great vigilance now on the part of regulators, in terms of staying close to markets, as we work our way through this situation," Paulson said. "We want to get the balance right. We don't want to rush to judgment and overreact."

Paulson said he "is just leaning against the wind a little bit, because I don't want to overreact in ways that penalize the global economy for years to come."

Further, Paulson said, the credit crisis should not necessarily result in tighter hedge fund regulation. "I don't believe anyone thinks hedge funds precipitated this period of turbulence," he said. "It really came from mortgage origination. The issues we are looking at most closely stem from mortgage origination in the U.S."

Vanguard Updates Intranet To Improve Efficiencies As Well as Public Internet

Vanguard has updated its intranet to improve collaboration, so that employees can better communicate with one another and the platform can serve as a testing ground for new interactive tools for customers, Information Week reports.

In fact, employees can customize their graphical user interface to the new intranet, called CrewNet, to include access to e-mail, shared documents they can work on with colleagues, news feeds and a calendar. Vanguard was particularly keen to migrate the company e-mail to CrewNet, in order to drive traffic, and usage, to the site.

Future enhancements include being able to track down experts in various areas at the company, adding links to blogs and wikis, and making it possible for employees to share ideas and even brainstorm. Eventually, the company intends to also add a natural language search tool that allows employees to ask a full question-not just type in a key word-and find information across their e-mail, the website and an Oracle database. By 2009, Vanguard estimates the new communication tool will save it $10 million a year, as measured by a reduction in employees' time wasted on searching for information.

And since Vanguard doesn't have any retail outlets and its website is such a critical way to communicate with customers, the company is testing new interfaces and tools on its intranet before rolling them out on its public website. The ultimate goal is to provide customers with the best Web experience possible and even tailoring information on its website to fit the needs of various demographic groups.

Last year, for example, Vanguard tested rich Internet applications on its intranet. "It was really R&D spending for us," said Chief Investment Officer Paul Heller. "If there are going to be bugs, better they be with us."

As Information Week puts it: "If Amazon, where you spend several hundred dollars a year, has incredibly useful features for you, and the site where you have your $500,000 401(k) has none of them, that hardly inspires confidence."

Legg Ends Exclusive Sales Deal With Smith Barney

Although Legg Mason established an exclusive sales arrangement for its mutual funds with Citigroup's Smith Barney brokerage division two years ago when they made their swap, Legg Mason has now renegotiated that in an effort to boost fund sales, the Baltimore Sun reports.

Two years ago, Legg Mason swapped its brokers for Citi's asset management unit, which made Legg one of the world's largest asset managers, with more than $1 trillion under management.

Since then, however, some of Legg Mason's funds have underperformed and flows have sagged, even though the deal gave it access to the large brokerage network of Smith Barney. In the second quarter, clients withdrew $7 billion from Legg Mason's stock funds.

The new arrangement still gives Smith Barney exclusive rights to the primary shares of Legg Mason funds, but other share classes are now available to a broader market.

"We remain committed to working together to make Legg Mason's world-class investment products available to individual and institutional investors around the world and to help our clients achieve their investment goals," said Mark R. Fetting, a senior vice president at Legg Mason.

Nuveen Plans to Double Mutual Fund Assets

Nuveen Investments plans to double its mutual fund assets to $40 billion in the next three to five years, a departure from its previous concentration on institutional and high-net-worth investors, Reuters reports.

In sync with this, the company is planning to seed the capital for the launch of 10 new mutual funds, including one on Oct. 1 that will use hedge fund strategies similar to those of its Symphony family of hedge funds, said Alan Brown, head of Nuveen's mutual fund business. Since Brown assumed this position in late 2005, the company seeded capital for 13 mutual funds and launched six in 2006. So far this year, it has seeded one fund and launched four. Those actions increased the firm's mutual fund assets by 66% from $12 billion to $20 billion today.

"In three to five years, we'd like to see that in the $40 billion range," said Brown, whose title is executive vice president of the mutual fund business.

Russell Suggests New Tack For Retirement Income

Russell Investment Group Senior Strategist Richard K. Fullmer has offered a new approach to retirement income planning.

With a primary focus on providing a steady stream of income for retirees, and making leaving an inheritance to beneficiaries a secondary goal, Fullmer argues that most financial planners do not treat asset decumulation as a separate goal from asset accumulation. Fullmer also said that modern portfolio theory doesn't take longevity risk into account.

Thus, instead of concentrating on annuities and spending management as a solution to retirement income, Fullmer advocates doing a better job of managing a retiree's portfolio through a dynamic asset allocation strategy. He also said that investors should not buy an annuity before they need one.

"Although modern portfolio theory may serve the industry well for those saving for the future, it falls short as a methodology for decumulation," Fullmer said. "Traditional modern portfolio theory assumes no cash flows, which are the retiree's primary investment objective, and ignores the investor's risk aversion for failure to achieve the cash flows."

To manage longevity risk, Fullmer said an investor and their financial planner should start with a date certain that the investor is unlikely to reach, and work backwards from there, creating a spending and investing plan to last to that date.

BenefitStreet DC Platform Ties Mutual Funds, ETFs

BenefitStreet has launched a new 401(k) platform that can support both mutual funds and exchange-traded funds. It's a big advancement for 401(k) platforms since traditional 401(k) recordkeeping systems were designed to allow investments in mutual funds, not ETFs or other products that trade whole shares on an exchange. Previously, BenefitStreet offered a separate, ETF-only 401(k) platform.

"Rather than having to choose one or the other, we're excited to see BenefitStreet's ability to combine ETFs and mutual funds in the same plan offering," said Tim Nihill, manager of retirement products and services at Commonwealth Financial Network. "The original ETF 401(k) plan's only barrier to entry for a number of our corporate clients was that it took away the ability to also invest in mutual funds. We believe that most participants will find the ETF portfolios very appealing once they see how lower fees can positively impact long-term performance."

Stowers Medical Institute Opens Commercial Arm

The Stowers Institute for Medical Research has opened a commercial arm, BioMed Valley Discoveries, whose goal is to produce cures or biomedical advancements that can be used for new drugs, research or startup companies, the Kansas City Star reports.

"Our focus is on translating basic biomedical discoveries into applications that will improve human health," said David Chao, president and chief executive officer of BioMed Valley Discoveries. Chao previously headed licensing and research agreements at the Novartis Institute of Biomedical Research.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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