Photo Credit: David Watmough

In December 2011, the SEC announced a new initiative entitled The Aberrational Performance Policy. The initiative's goals include the identification and scrutiny of high-performing hedge funds.

The filters through which funds are scrutinized include misrepresentations of conflicts of interest, liquidity, investment management credentials and strategy. Four complaints were filed under the new initiative between November and December 2011.

Another initiative/program rolled out over the past few months of 2011--The Problem Advisers Initiative--seeks to monitor securities laws compliance by advisers. Information routinely presented by the advisers to clients relating to experience, performance, credentials, and education are scrutinized under the initiative. By identifying adviser misstatements and nominal misrepresentations, the SEC hopes to identify potential problem advisers before investors lose money.

Using proprietary risk screens to screen SEC's proclaimed "outlier" funds--those returning higher than market returns with lower than market volatility--helps to identify mismatched strategies and returns. The goal of the analysis is to identify funds that routinely return 3%+ above the average market return, according to Robert Khuzami, Director of Enforcement at the SEC. Khuzami likens the initiatives to New York's "broken windows" strategy of the 1990s. Identifying small problems may alert the SEC to larger, more substantial issues.

In the wake of large fund and firm collapses, the SEC's front-runner approach is a wake-up call for funds lacking the proper controls and risk management systems. Fund statements, and the accuracy of these statements, are essential in today's relations with the SEC.

Photo Credit:twocentsmore

Feedback from financial advisors in our network continues to support the conclusion that China's economic expansion and financial markets remain in high growth mode.

Most financial advisors in our network believe that China's ability to manufacture or assemble goods at a low cost basis in a highly competitive economy is key to future growth. High personal and household savings rates--and China's self-reliant attitude--help investors to separate what China's outstanding debt means to the country's future.

Financial advisors here are still worried about China. The government's tight control of information isn't like our own constant flow of orderly and audited information. Accounting problems, when discerned, get the attention of short sellers. Sino Forest Corporation lost almost $6 billion of its capitalization as short sellers traded on the company's bad accounting practices in Q1 to Q2 2011. China's officials responded to short sellers by publishing "Measures for the Administration of Margin Trading and Short Sale of Securities of Securities Companies" in October 2011.

Other regulations regarding stock index futures' concerns and downward trading pressure is reflected in the government's May 2011 publication of "Rules Regarding Stock Index Futures" by China's Securities Regulatory Commission. The report provides guidelines for the use of stock index futures use by Qualified Foreign Institutional Investors.

As European countries continue to focus on how to resolve the debt crisis, credit rating downgrades of the AAA-rated countries are under possible discussion by Standard & Poor's. According to The Financial Times, S&P; has established a "creditwatch negative" status of the remaining AAA-rated European countries.

If S&P; confirms plans to place the European nations on creditwatch negative status, each nation's prized AAA-credit status is subject to a downgrade within 90 days.

A lowered credit rating will require sovereign nations seeking bond loans to pay higher rates of interest. European nations need stability and the benefit of the highest credit ratings now!

The world's financial markets are undeniably interconnected. Europe represents the largest market for goods produced by U.S. manufacturers. In addition, European securities are widely embraced by both U.S. financial advisors and investors.

Europe is close to the hearts, minds, and finances of Americans. Downgrades of AAA-rated nations in the EuroZone will affect the U.S. financial markets and the future profits of many Americans.

Downgrades in the EuroZone will also affect Asia. And China, according to our network of financial advisors, is a potential hotbed of concern in 2012.

Photo Credit: Duboix

There's no doubt that the Western world understands the need to help countries of the European Union in 2011. As financial advisors discuss the state of the EuroZone, they simultaneously say that Europe's woes are really old news.

What keeps them up at night is the Red Dragon. Not the movie starring Anthony Hopkins, of course. China worries economists. Financial advisors using their research say China's markets warrant extreme caution in 2012.

After years of double-digit economic growth, Chinese government officials published a five-year report (2011 to 2015) earlier this year. The goals of the next five years include reducing exports and manufacturing and increasing consumption in The People's Republic of China.

Costs of commodities continue to increase in China, and so does the cost of food. Inflation in China (about 5.5%) may be lower than inflation in India (the food basket rate of inflation was recently recorded at about 8% in November 2011), but the region's high growth demands for goods and services is likely to keep inflationary pressures constant for the next few years.

Demand for energy, precious metals (gold, and silver in industrial use), and other metals may reflect peaks and valleys in the financial markets. Housing demand in China's cities, after years of aggressive construction plans, is soft in 2011. According to residential real estate experts in China, real estate investors could lose money in the short term.

China's S&P; credit rating is AA-. Although the country's sovereign debt rating is investment grade, many Chinese corporations followed by Standard & Poor's show signs of economic stress. Watch for additional downgrades of larger industrial corporates in 2012.