Financial Regulatory Forum

Hedge Standards body tightens rules after Madoff

July 1, 2009

Antonio Borges   By Laurence Fletcher
   LONDON, July 1 (Reuters) – A heavyweight European hedge fund industry group said it plans to tighten disclosure and governance rules in response to investor demand for more transparency in the wake of the credit crisis.
   The Hedge Fund Standards Board, which sets a closely watched industry code that is obligatory for its 56 members, said it plans to require the funds to appoint independent third-party administrators and custodians.
   “These new standards would help to safeguard investors’ assets and also lead to improvements in the redemption regime for hedge funds,” HFSB chairman Antonio Borges said in a statement on Wednesday.
   The changes, which are subject to consultation with the industry, would mean a third party would administer a fund, prepare its accounting records and calculate net asset value.
   Hedge funds would also have to meet tougher rules on disclosing any potential move to limit investors’ access to their cash, said the HFSB, which represents some two-thirds of the European industry.
   The new rules come in the wake of U.S. financier Bernard Madoff’s $65 billion fraud, which went undetected for so long partly because functions such as net asset value calculations were conducted internally.
    “The HFSB standards would already make it very difficult for a Madoff-type scandal to occur but we believe it is right to raise the bar higher in the light of recent events,” Borges said in the statement.
   Many investors have threatened to shun hedge funds that do not use third parties to verify positions, valuations and cash balances.
   The HFSB, which in January came in for heavy criticism from a parliamentary committee investigating the banking crisis over its slow take-up rate, also said 12 new fund managers had signed up to the standards, taking the total to 56.
   The new signatories include NewSmith Asset Management, one of the firms to appear before the parliamentary committee.
   In April Borges told Reuters the body wants to have around 100 signatories by the end of the year.

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