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Securities and Exchange Commission Chairman William Donaldson scolded hedge fund lawyers on Friday for their roles in recent market-timing scandals and late-trading abuses that have rocked the industry. “Think how much anguish we could have avoided if a few more lawyers had pointed out to their hedge fund clients that late trading of mutual fund shares is illegal, as are duplicitous market-timing arrangements,” Donaldson told securities lawyers at the Practising Law Institute’s annual SEC Speaks conference. “Those of you who advise hedge funds have a particularly good opportunity to help your clients by promoting their ethical business behavior.” The SEC sued some of the largest U.S. mutual funds during the past two years, accusing them of market timing — allowing hedge funds to trade rapidly in their funds, in violation of their internal bylaws. Market timing, the rapid buying and selling of fund shares, is not illegal, but many funds were prosecuted for saying they did not permit it, only to allow hedge fund clients to engage in the action. The agency also found that some fund managers allowed illegal late trading — placing same-day orders after the official 4 p.m. end of trading in the New York Stock Exchange — in their funds by managers of hedge funds in return for investments by the hedge funds. Donaldson added that the agency has tried to curb such activities by requiring hedge fund managers to register with the agency and open their books to periodic, random review by SEC examiners. Previously, SEC Commissioners Cynthia Glassman and Paul Atkins, who voted against adopting the agency’s hedge fund registration rule, have both pointed out that late-trading and market-timing abuses occurred despite the requirement that mutual funds register with the agency. Separately, SEC chief accountant Donald T. Nicolaisen said during the conference that the commission’s accounting division intends to provide guidance on a new rule that requires companies to expense employee stock options just like salaries or any other compensation. The new rule promulgated by the Financial Accounting Standards Board has come under fire, mostly from high-tech companies claiming that the models used to value options are flawed. A lobbying effort has been under way to persuade the SEC, which oversees FASB and supports the rule, to provide companies with specific guidance on valuation as well as to delay implementation of the rule. “We received a request to provide implementation guidance, and we hope to be helpful in attempting to accurately and reasonably measure stock options,” Nicolaisen said. He added that while he hoped the guidance would be in place before companies figure their first-quarter results, he also suggested that companies already able to adopt the rule “do so.” The chief accountant also said that the key priorities of the division this year would be to reduce the complexity in financial reporting, assess the implementation of � 404 of the Sarbanes-Oxley Act, make better use of technology and continue to work toward international convergence of accounting rules. Copyright �2005 TDD, LLC. All rights reserved.

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