Alternative Investments

ITG, AlterNet Securities to Pay $20.3M to Settle SEC Charges that it Misused Confidential Dark Pool Data, Ran Secret Trading Desk

Published on: August 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

ITG Inc. and affiliate AlterNet Securities will pay $20.3M to resolve Securities and Exchange Commission charges accusing them of running a secret trading desk and misusing dark pool subscribers’ confidential trading information. As part of the settlement, ITG admitted to wrongdoing.

According to the regulator, even though it told the public it was an “agency-only” broker with interests that were not in conflict with the interests of customers, the firm ran Project Omega, an undisclosed proprietary trading desk, for over a year. The SEC’s probe found that even though ITG said that it protected dark pool subscribers’ trading information, for eight months, the trading desk accessed feeds of order and execution data and used the information to put into place its strategies for high-frequency algorithmic.

SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

Published on: June 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

SEC Working on Mutual Fund Regulations, Conducts Dark Pool Probes, Enacts New Exchange Rules

Published on: November 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is developing regulations that would make sure that mutual funds are liquid enough to satisfy client redemptions and money managers have a plan should a fund fail. Part of the regulator’s strategy may include limiting how mutual funds are allowed to place in assets that are hard-to-sell and use derivatives to enhance returns.

InvestmentNews reports that according to a report issued by the International Monetary Fund last month, mutual funds’ holdings of leveraged loans, junk bonds, and other assets that don’t trade often had higher market and liquidity risks. The IMF said that this could “compromise” financial stability unless the matter is dealt with. Mutual funds also have come under the Financial Stability Oversight Council’s scrutiny.

Per the SEC’s agenda, regulators could propose new mutual fund rules in October of next year. Earlier this year, when Commission Chair Mary Jo White talked about an action plan that the agency was developing to enhance asset management oversight, she noted that the regulator intends to mandate that mutual fund investments provide more disclosures. The SEC has been seeking to gain greater insight into whether the asset management industry presents a risk to the financial system.

Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar

Published on: July 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a survey issued by Morningstar Inc., financial advisers may be using the wrong benchmark when evaluating and choosing alternative investments. The research firm and Barron’s magazine questioned 301 advisers and 372 institutional investors.

Right now, the most popular way that advisers assess their investments’ performance is with a standard benchmark index and not by measuring performance against customized benchmarks, competitor funds, or risk-adjusted analysis. While about 25% are using the Russell 2000, the S & P 500, or similar benchmarks, the rest of those who were surveyed work with different methods.

Now, however, there are industry executives and analysts who are saying the index benchmarks are not up to the job of assessing the funds’ performance. Alternative investments typically employ different strategies and may have distinct goals.