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Week in Review

SEC Increasing Scrutiny of Insider Trading at Hedges; Issues Questions to Funds

The Securities and Exchange Commission has sent hedge funds a list of questions they should pose to employees and clients who are privy to information that would constitute insider trading if they were to share it with portfolio managers, the Associated Press reports.

In particular, the SEC is asking hedge funds for a list of all of their employees and clients and any of their relatives who are executives or directors at publicly traded companies.

"This is an effort to look out for potential insider trading at hedge funds and to ensure that hedge fund advisers are living up to their obligation to detect and prevent insider trading," said Mark Schonfeld, director of the SEC's New York regional office.

But hedge funds are taking the request in stride, according to Nora Jordan, a hedge fund attorney at Davis Polk & Wardell. Jordan said she didn't expect it to result in any information. "It would surprise me if they found some big smoking gun on this," she said.

The SEC came under scrutiny last year when one of its former attorneys charged that his superiors had prevented him from investigating insider trading information a prominent Wall Street executive had shared with a hedge fund.

Last month, the Senate issued a report recommending that the SEC establish formal procedures for conducting enforcement investigations.

SEC Examining Funds' Sub-Prime Holdings

The Securities and Exchange Commission has contacted the 25 largest mutual fund companies in the nation to inquire about their holdings of mortgage-backed securities, according to Douglas Scheidt, associate director in the SEC investment management division, Bloomberg reports.

"We have talked to several about whether they are having difficulties in valuing [sub-prime debt and how they are dealing with] significant redemptions," Scheidt said. "If they sell off the more liquid securities to satisfy redemption requests, then the valuation of the remaining portfolio becomes even more critical."

Barry Barbash, former head of the SEC's division of investment management and now a partner with Willkie Farr & Gallagher, explained that if such instruments were overvalued, redemptions were then inflated.

U.S. Treasury Secretary Urges Regulators Not to Overreact to Credit Crisis

U.S. Treasury Secretary Henry Paulson, in Europe to meet with regulators in London and Paris, said they shouldn't necessarily overreact to the credit crisis by imposing additional regulations, Dow Jones reports.

Paulson said the credit crisis and investment firms' lower appetite for risk will eventually pass, and that in the meanwhile, regulators shouldn't impose tighter requirements on financial services firms because that could stunt innovation.

"There is great vigilance now on the part of regulators, in terms of staying close to markets, as we work our way through this situation," Paulson said. "We want to get the balance right. We don't want to rush to judgment and overreact."

Paulson said he "is just leaning against the wind a little bit, because I don't want to overreact in ways that penalize the global economy for years to come."

Further, Paulson said, the credit crisis should not necessarily result in tighter hedge fund regulation. "I don't believe anyone thinks hedge funds precipitated this period of turbulence," he said. "It really came from mortgage origination. The issues we are looking at most closely stem from mortgage origination in the U.S."

Vanguard Updates Intranet To Improve Efficiencies As Well as Public Internet

Vanguard has updated its intranet to improve collaboration, so that employees can better communicate with one another and the platform can serve as a testing ground for new interactive tools for customers, Information Week reports.

In fact, employees can customize their graphical user interface to the new intranet, called CrewNet, to include access to e-mail, shared documents they can work on with colleagues, news feeds and a calendar. Vanguard was particularly keen to migrate the company e-mail to CrewNet, in order to drive traffic, and usage, to the site.

Future enhancements include being able to track down experts in various areas at the company, adding links to blogs and wikis, and making it possible for employees to share ideas and even brainstorm. Eventually, the company intends to also add a natural language search tool that allows employees to ask a full question-not just type in a key word-and find information across their e-mail, the website and an Oracle database. By 2009, Vanguard estimates the new communication tool will save it $10 million a year, as measured by a reduction in employees' time wasted on searching for information.