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This guest post from Blake, Cassels & Graydon LLP, co-authored by Ross McKee, Partner, Blake, Cassels & Graydon LLP, is reprinted here with permission. 

INTRODUCTION

The Canadian Securities Administrators have proposed a new uniform Canadian registration exemption for investment sub-advisers, as part of a package of proposed amendments to Canadian registration rules. The proposed exemption will add a chaperone requirement that does not exist under the current sub-adviser exemptions in Ontario and Quebec. In addition, no adviser registration exemptions (such as sub-adviser or international adviser) could be relied upon by anyone registered as an adviser in any jurisdiction of Canada.

When registration reforms were introduced in 2009, one of the missing elements was a uniform national sub-adviser registration exemption for foreign advisers to a registered Canadian portfolio manager. This can arise when a Canadian portfolio manager seeks specialized investment expertise from a foreign adviser.

Ontario has long had an automatic exemption for sub-advisers under section 7.3 of OSC Rule 35-502 Non-Resident Advisers. Quebec has the similar exemption under Decision No. 2009 PDG-0191. In 2009, other provinces stated they were prepared to grant similar sub-adviser exemptions but only upon application. 

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Written by: Jay B. Gould

On December 12, 2013, the Securities and Exchange Commission (SEC) charged a London-based hedge fund adviser and its former U.S.-based holding company with internal controls failures that led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.  The investigation came out of the SEC’s Aberrational Performance Inquiry, pursuant to which the Enforcement Division’s Asset Management Unit identifies suspicious performance through risk analytics.  The SEC searches for performance that is inconsistent with a fund’s investment strategy or other benchmarks and then conducts follow up inquiries.  In this case, the SEC worked with the United Kingdom’s financial regulator, the Financial Conduct Authority.

According to the SEC’s order instituting settled administrative proceedings, the GLG firms managed the GLG Emerging Markets Special Assets 1 Fund.  From November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25 percent private equity stake in an emerging market coal mining company.  The overvaluation resulted in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC. 

The SEC order also stated that GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee.  On a number of occasions, GLG employees received information calling into question the $425 million valuation for the coal company position.  The SEC found that there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all.  There also appeared to be confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.  

The SEC’s order found that GLG Partners L.P. violated and GLG Partners Inc. caused numerous violations of the Federal securities laws.  It also required the GLG firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.  The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679, and penalties totaling $750,000.

The SEC has been targeting valuation cases recently as evidenced by the recent enforcement action against the Morgan Keegan fund directors and in the Ambassador Capital case.  Fund managers should review their valuation policies and procedures to make sure that such policies and procedures address current regulatory concerns, and to make sure that the disclosures in their fund documents are consistent with actual practice.

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This article was published by Investcorp and is reprinted here with permission.

Executive Summary

This paper analyzes correlations between credit spreads and interest rates across various sectors and credit ratings in the US. Our work was prompted by chairman Bernanke’s announcement this summer of possible tapering of the ongoing quantitative easing program which marked a turning point for interest rates from their historically low levels. We analyze data from 1990 to the present and use a statistically robust multi-factor risk model framework which can be calibrated to draw both long-term and short-terms conclusions. Our findings are relevant for credit portfolio managers contemplating the impact of rising interest rates and steepening Treasury curve on corporate bond portfolios.

Consistent with our earlier studies, we find strong negative correlation between sector spreads and rate shifts and twists. A uniform increase in rates is associated with tighter credit spreads, while a uniform drop in rates leads to wider spreads. In most industries, with the exception of the banking and brokerage and the consumer sector, lower credit quality is associated with stronger negative correlation.

We compare our current estimates with the results of a similar analysis we conducted in 2003 and find many similarities but also some notable differences. The long-term models estimated currently and 10 years ago show similar patterns. However, the short-term versions are quite different. The short-term correlation estimates in 2013 are much weaker than those from 2003 – likely a result of the Fed’s ongoing quantitative easing program which has weakened the normal relationships between the economic recovery (represented by spreads) and monetary policy (represented by rates). Moreover, correlation patterns in the banking and brokerage sector have changed prior and post the financial crisis. These results have important implications for risk management as well as for identifying relative value opportunities across sectors with different
rate sensitivities.

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