FSA Warns Activist Hedge Funds On Tactics

Discussion in 'Wall St. News' started by crgarcia, May 28, 2007.

  1. By Bill McIntosh, Senior Financial Correspondent | Friday, May 25, 2007

    LONDON (HedgeWorld.com)—The Financial Services Authority, Britain's financial watchdog, has warned activist hedge funds that collusion could be an offense under its market abuse directives, but has also made clear that such investors are a legitimate part of the financial markets.

    The regulator's comments on activism were delivered in a publication titled Markets Division: Newsletter on Market Conduct and Transaction Reporting Issues. The FSA newsletter can be accessed here. The missive comes amid unprecedented growth in European activist hedge funds and a corresponding increase in their public profile, notably in the role of The Children's Investment Fund putting ABN Amro in play and contesting a possible takeover by Barclays.

    "We don't think our market abuse powers should be relevant where market professionals are looking to take advantage of their own expert analysis of otherwise publicly available information," the FSA said. It noted, however, that "we might reach different conclusions if other participants also come to trade on the basis of another participant's strategy."

    Managers contacted by HedgeWorld were ambivalent about the FSA's intervention. Noting that the regulator had been asked by funds to clarify its thinking, one manager of a long/short equity fund that abjures activism termed the clarification "constructive." Other managers, however, had a mixed view. They acknowledged that collusion to escape disclosure requirements on stake sizes as so-called concert parties is an obvious no-no. However, they expressed some confusion about the perceived stricture against trading on another participant's strategy, especially if it was a matter of public knowledge.

    The FSA also addressed the potential for abuse in the case of a participant generating a rumor in the knowledge that it was false in order to take advantage of short-term movements in the price of a security. The regulator noted that market participants are required to take "reasonable care" not to send "deceptive signals about their intentions." The determination of market abuse would take account of whether a "reasonable person" could or should know that information was misleading.

    The strictures did not, however, address one of the key factors in the activist's tactical playbook: the use of contracts for difference to build stakes while avoiding disclosure that is normally required when a holding in a security passes 3%. The FSA currently is preparing a discussion paper on this issue that is expected to be published in July. It already has amended the rules on CFDs requiring buyers to declare at the 1% level once a target company is the subject of an approach and comes under the jurisdiction of the U.K. Takeover Panel.

    In the same publication, the regulator also clarified the procedures investment banks should follow in executing block trades (so-called bought deals) on large chunks of a security. The FSA noted that it has received representations from banks that some firms, who have been made insiders about a potential block, have sold before the trade became public, hurting the market in that issue. "We believe that such selling by third parties could amount to insider dealing, and we would consider taking action in these circumstances," it said.

    Precedent shows that the FSA has a strong hand in this area. Last year, it won two prosecutions against GLG Partners LLP and its former star trader Philippe Jabre Previous HedgeWorld Story involving trading violations.