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FSA Proposes Regulation Overhaul

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LONDON (–The UK’s Financial Services Authority has proposed a sweeping change in the system by which it regulates investment funds–a change that would introduce some hedging strategies to the retail market.

The proposal, announced May 21, would simplify a very complicated regulatory structure. There are at present eight distinct categories of retail collective investment scheme. The FSA now proposes two broad types. One would consist of undertakings for collective investments in transferable securities, pursuant to the requirements for such UCITS established by the European Union. The other, under the catchall title non-UCITS funds, will invest in a broader range of assets than the EU would allow, including property. It would also be allowed to limit opportunities for redemption, so long as they are no more than six months apart.

The reform also would create a new category of non-retail schemes; in effect, U.K.-registered hedge fund, aimed at “institutional and expert investors only” that will nonetheless be subject to rules “robust enough to distinguish them from unregulated schemes.”

Furthermore, the FSA will allow performance fees for unit trusts and open-ended investment companies, which will bring U.K. practice in accord with that of the rest of Europe, the FSA statement said.

The consultation period on this reform ends on Oct.31. The FSA is looking to implement sometime early next year.

The day before the release of these proposals, the head of the FSA, Howard Davis, spoke about hedge funds and global regulation at a forum in Singapore.

According to a Dow Jones report, he praised the U.S. Securities and Exchange Commission for its ongoing investigation of the appropriate regulatory system for hedge funds, adding: “I am not one of those who believes that hedge funds are inherently dangerous beasts in the financial jungle. Indeed in many cases hedge funds have been useful in being prepared to take positions, sometimes counter cyclical positions, which have helped stabilize markets. But the sector has grown dramatically, and as the Long-Term Capital Management problem showed, if leverage is uncontrolled, even one fund alone can be a destabilizing factor.”

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