FSA cold calling of traders will you hang on the telephone

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					FSA cold calling of traders

   FSA cold calling of traders: will you hang on the telephone?
                             FSA and SEC act to confront market abuse

The pressure from regulators on hedge fund managers in relation to market abuse continues
to mount. As we have reported previously, the FSA intends to commence this month a series
of formal reviews (or re-reviews in some cases) of the system and controls in place at hedge
fund managers to address the issue. The FSA has also expressed its intention to take
disciplinary action where standards are below its expectations. For details of our discussion
of market abuse controls click here.

The increased focus in this area is evident in a number of regulatory developments along
parallel lines both here and in the US. One way or another, these initiatives may impact UK
based managers.

The FSA recently announced new requirements for the taping of telephone conversations
(click here for our summary) as part of its campaign to toughen up on market abuse.

It has also emerged that the FSA’s Enforcement division has recently begun to conduct
interviews with front office staff over the telephone where it has concerns that a particular
trade may raise market abuse concerns. These interviews are recorded and the call is placed
without prior warning to the interviewee or the firm’s compliance department. The rationale
for this is that an early interview is more useful in establishing the facts when memories are
fresher and also unfounded concerns can be quickly dispensed with.

FSA investigators are cautioning traders before asking questions i.e. the interviewee is told
that there is no obligation to say anything but it may harm their defence if a matter is not
mentioned in the interview which they later rely on in court. The interviewee is also told that
anything they do say may be given in evidence. The caution is the same as that given by the
police to suspects in criminal cases. The purpose is to remind a person that they have a
privilege against self-incrimination and, from the FSA’s perspective, it is intended to allow the
regulator to submit anything said by the interviewee into evidence at court. A caution is only
administered where there is suspicion that an offence has been committed.

These interviews are voluntary and it is unlikely that the FSA would regard a refusal to answer
questions immediately as a breach of the principle which requires co-operation with the

However, there are serious issues for firms to consider here and staff should be advised as to
how their firm expects them to behave should any individual be asked to partake in an
interview over the telephone.

It is important that firms consider how best to protect their interests and the interests of their
trading staff. Relevant considerations would be:-

          whether it might be appropriate for staff to be advised that they should politely
           request the FSA that the interview be conducted after the firm’s compliance and/or
           legal department has been consulted (many firms are likely to have a policy that all
           contact with a regulator be conducted by senior management and/or the compliance
           department or at least in their presence);

IMS Consulting
FSA Cold Calling of traders: will you hang on the telephone?
FSA and SEC to confront market abuse
FSA cold calling of traders

          whether a firm takes the view that an employee should take advantage of the right to
           seek legal advice before answering any questions;

          whether sufficient information has been disclosed by FSA to enable the interviewee
           to make an informed decision about answering questions immediately;

          whether sufficient information has been provided to enable the interviewee to give
           correct information to the investigator (to avoid potential misunderstandings which
           could be damaging);

          it is important to avoid any impression that an FSA investigation could be prejudiced
           and it may be necessary for staff to be advised that they should not discuss a request
           for such an interview with anyone outside the compliance or legal department.

The focus on market abuse and hedge funds is also currently a priority in the US. The
Chairman of the SEC, Christopher Cox recently announced the setting up of a dedicated
special enforcement working group to tackle market abuse by hedge fund managers. He
commented that, “This kind of activity remains a significant threat to market integrity. Any
hedge fund or other large investor who thinks they’ll get away with dishonest and unfair
dealing in our markets will face the concentrated resources of a relentless SEC.”

UK hedge fund managers will be aware of the vigour with which US authorities seek the
extradition of anyone whose activities appear to damage their interests as shown by the cases
of the Nat West Three and the recent case of Ian Gibson. We continue to worry that the SEC
will seek to extradite UK portfolio managers when they suspect market abuse. Picture this:
sharing a US prison cell with a drink driving celebrity. Not what you envisaged when you set
up your UK based hedge fund management firm.

In summary, the regulatory environment for hedge fund managers continues to be tightened
on both sides of the Atlantic. This is absolutely right where there is wrongdoing but it also
raises the likelihood all market participants be impacted in the ensuing rout since the
regulators need to cover a lot of ground in looking for the bad guys.

IMS Consulting
FSA Cold Calling of traders: will you hang on the telephone?
FSA and SEC to confront market abuse

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