ISLA Chief Says EU Regulation Fears Causing Hedge Fund Short-Selling Clampdown

The CEO of the International Securities Lending Association Kevin McNulty warned that hedge funds are abandoning short-selling because of uncertainty over looming European Union regulations.

(June 14, 2011) — Kevin McNulty, the CEO of the International Securities Lending Association (ISLA), claimed in a June 14 press conference that fears over imminent European Union regulations are causing hedge funds to shun short-selling.

Hedge funds are fearful, he said, that new EU regulations will require them to disclose their short positions publicly and possibly even allow authorities to ban the practice entirely.

The International Securities Lending Association represents banks, pension funds, insurance companies, and agents that either lend out securities or facilitate the activity.

“Hedge funds like to have a level of certainty on their ability to execute and live with a trade for some time,” McNulty said. “Short-selling is good for markets while artificially stopping short-selling is a bad thing.” He stressed that short sellers have more than halved borrowing, from $4 trillion before the recession to around $1.8 trillion now.

For more stories like this, sign up for the CIO Alert newsletter. 

While most economists have long concluded that short-selling is a net positive for markets, it has emerged as a frequent scapegoat after the recent financial crisis, Dow Jones Newswires reported.

Concern over EU regulations is not unique to hedge funds. A recent survey by Pension Fund Barometer found that heightened regulation was the second greatest worry among UK pension fund managers, right after the threat of inflation.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

The Supreme Court ruled June 13 that Janus Capital Group could not be sued for securities fraud over misstatements in its mutual funds’ prospectuses.

(June 14, 2011) — In an acrimonious June 13 decision, the Supreme Court ruled 5-4 that Denver-based Janus Capital Group could not be held liable for false statements made in the prospectuses of its subsidiary mutual funds that it formally advised.

Janus Capital Group’s shareholders brought the class-action securities fraud lawsuit against the company after Janus became embroiled in a market-timing scandal in 2003. After New York’s attorney general sued Janus Capital Group for allegedly inflating its stock price through delays in fund valuation, shareholders sued Janus because its funds’ disclosure documents stated that the company would curb trading strategies based on such policies.

At issue was whether Janus Capital Group and its subsidiary Janus Capital Management could be held liable for their mutual funds’ misstatements and thus be charged with violating the Securities and Exchange Commission’s (SEC) rule prohibiting “any person, directly or indirectly” from “mak[ing] any untrue statement of material fact” in connection with buying or selling securities.

Justice Clarence Thomas, writing for the majority, argued that only the mutual funds themselves and not their advisors could be held liable. Justice Thomas’ logic revolved around his interpretation of the word “make.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“One who prepares or publishes a statement on behalf of another is not its maker,” Justice Thomas wrote. “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”

Justice Thomas ceded that the shareholders “persuasively argue that investment advisers exercise significant influence over their client funds.” He concluded, however, that “corporate formalities were observed” and the fund and its adviser “remain legally separate entities.”

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>