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U.K. FSA Expects High-Level Dialogues with U.S. SEC

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LONDON–Hector Sants, managing director, wholesale and institutional markets division of the U.K. Financial Services Authority, addressed a conference the FSA is hosting on the issues facing the asset management industry as well as its regulators.

He expressed his pleasure that Susan Nash, of the Securities and Exchange Commission, was at the conference, and he said that the SEC and the FSA are facing many common challenges. Ms. Nash is associate director of the SEC’s division of investment management.

After mentioning the recent market-timing scandals within the mutual funds industry in the United States, Mr. Sants said Tuesday that “also, more recent SEC proposals for the mandatory registration of hedge fund managers above a certain size are being viewed with interest from this side of the Atlantic … [and] the SEC are also interested in our proposals for soft commission and unbundling, so we envisage a high level of dialogue and cooperation between the FSA/SEC going forward on a number of sector issues.”

As to hedge funds, Mr. Sants observed that the industry is growing because it has successfully delivered a positive absolute return to its investors despite the hostile market environment of recent years. This success, along with changes in regulations in other European jurisdictions, is leading the FSA to reexamine its current prohibition on the marketing of hedge funds to private customers.

On a related point, the FSA is conducting a survey of prime brokers to get a feel for the potential effect of hedge funds on market stability given their use of leverage and illiquid assets.

“There is also the potential for conflicts of interest at prime brokers where profitability is increasingly linked to hedge fund trading activities,” he said.

On research, he said that one of the FSA’s core principles is that regulated firms should manage their conflicts of interests and act in the best interest of investors. This leaves the FSA clear about where it wants to go–toward transparency, disclosure, and “the emergence of a truly competitive marketplace in the provision of research, both broker-produced and independent.” But it has left unanswered questions about how to get there, and the FSA is trying to answer those questions by bringing together the Investment Management Association, the London Investment Banking Association and the National Association of Pension Funds to seek a consensus. Those industry groups are working on a new disclosure regimen with a delivery date of December 2004.

He warned, though, that the FSA will intervene in a more intrusive manner if the industry groups fail to deliver a consensus package.

Mr. Sants was appointed to his FSA position early this year, and began work in May. Before that, he was the chief executive officer of Europe, the Middle East, and Africa for Credit Suisse First Boston. He joined CSFB in 2000, when that firm merged with Donaldson, Lufkin & Jenrette.

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