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Komfie Manalo, Opalesque Asia:

Securities and Exchange Commission chief economist and director of Division of Economic and Risk Analysis (DERA) Mark J. Flannery has warned of the risks posed by market misconduct, particularly in the true valuation of assets by hedge fund managers.

In his speech at the Global Association of Risk Professionals 16th Annual Risk Assessment Convention in New York, Flannery said that there are several types of risks involving various forms of market misconduct. The cost of these risks falls on investors and on the integrity of financial markets, and the commission spends much time and effort trying to detect market misconduct.

Flannery said, "By this I mean conduct — often impermissible — that generates investment risk unrelated to the merit of projects underlying the investment. These situations are frequently motivated by conflicts of interest, and they are often undertaken in the presence of asymmetric information between various market participants. For example, when hedge fund managers misvalue assets to inflate or smooth their returns. Or corporate issuers misstate earnings. Or brokers privilege some investors over others when allocating trades — a practice called cherry picking."

He added that the SEC’s core mission is to protect investors and ensure fair and orderly U.S. financial markets. The SEC’s success in......................

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