Holland & Hart Securities Blog

The Subprime Crisis: A Major Shift in Priorities for the SEC

            Caught flatfooted by the meltdown in the subprime mortgage market, the SEC belatedly is investigating whether any wrongdoing occurred.  The origin of the subprime crisis is worth revisiting.  In a business environment featuring increasing home prices and significant demand for homes, “prime” borrowers with good credit locked in their rates.  Mortgage lenders extended credit to “subprime” borrowers with poor credit, who, due to poor underwriting practices, often were allowed to borrow more than they could repay.   This practice was facilitated by the issuance of asset-backed securities.   Mortgage lenders sold the loans to third parties who packaged them into pools and sold the cash flows to investors in the form of mortgage-backed securities. In turn, these third parties resecuritized the mortgage-backed securities to create collateralized debt obligations or "CDOs."

COURT INVALIDATES SEC RULES REQUIRING REGISTRATION OF HEDGE FUND ADVISERS

         In a serious blow to the SEC, the U.S. Court of Appeals for the D.C. Circuit recently invalidated Advisers Act Rule 203(b)(3)-2, requiring most hedge fund advisers to register with the Commission.  Goldstein v. SEC, No. 04-1434 (June 23, 2006). This ruling calls into question the SEC’s ability to regulate the entire hedge fund industry. 

Effective Responses to Findings of Deficiency

             Despite the best efforts of broker-dealers and investment advisers to fully comply with all relevant rules, there are times when NASD or SEC examiners find deficiencies during an examination.  This is not surprising, given the increasing complexity of securities regulation and current harsh political climate.  The manner in which a firm responds to a notice of deficiencies is critical.  This article describes the regulatory decisionmaking process and effective responses to such a notice.

New Rules Requiring SEC Registration of Large Hedge Fund Advisers

Introduction

On December 2, 2004, the U.S. Securities and Exchange Commission (“SEC” or “Commission) adopted a new rule and rule amendments under the Investment Advisers Act of 1940 (“Advisers Act”)[1] that made it much more difficult for advisers of hedge funds to avoid registration with the SEC.  Advisers had until February 1, 2006 to comply with the new rules.  Between January 1, 2005 and the close of business on February 1, 2006, the SEC declared effective 934 investment adviser registrations from hedge fund managers. [2] 

SEC Tightens Short-Selling Rules, but Critics Are Still Dissatisfied

If you’ve been following the news, you know that short-selling abuses are a subject of intense discussion and controversy.  Short selling is the practice of borrowing stock (usually from a broker-dealer or institutional investor), then selling it in anticipation that the price will go down.