Investment Management Industry News Summary - April 2005

Investment Management Industry News Summary - April 2005

Publications

This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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SEC sweep focuses on administration fees

April 22, 2005 1:11 PM
The SEC is rumored to have initiated a sweep exam of over 50 firms to examine whether administration fees are being used to cover related expenses such as recordkeeping and compliance services, as opposed to marketing and distribution costs. Although Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, would not confirm that a sweep in this area was being conducted, she recently stated that some of the SEC staff’s examinations of fund expenses have revealed that they were not being used for their stated purposes. In light of these practices, she urged external auditors to confirm that “monies taken out of the fund are actually for legitimate and approved expenses.”

Ignites, “SEC Sweep Scrutinizing Administration Fees” (Apr. 21, 2005); Lori Richards, Director of the SEC Office of Compliance Inspections and Examinations, Speech before the National Regulatory Services’ 20th Annual Spring Compliance/Risk Management Conference (Apr. 20, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

New York Stock Exchange (“NYSE”) settles SEC enforcement action for failure to police specialists

April 22, 2005 12:54 PM
The NYSE settled an enforcement action with the SEC, which found that the NYSE failed to detect, investigate, and discipline unlawful proprietary trading by specialists conducted over the course of nearly four years at the exchange, including “interpositioning” and “trading ahead” of customer orders, which resulted in more than $158 million of customer harm. “Interpositioning” refers to the practice of effecting two improper proprietary trades close in time by filling both opposing orders from the proprietary account at prices that enable the firm to profit from the spread of both prices. “Trading ahead” refers to the practice of filling one executable order out of the firm’s own account rather than matching it with another executable public order, and then filling the second executable public order through an agency trade at a less advantageous price. The NYSE’s response to these improper proprietary trading practices was deemed to fail in three areas:

  • Surveillance of Trading Ahead and Interpositioning Violations. The NYSE relied upon an automated surveillance system to detect improper trading practices, which captured only a small portion of the misconduct.
  • Investigation of Trading Ahead and Interpositioning Violations. The surveillance unit responsible for reviewing the most egregious instances of trading ahead and interpositioning violations routinely overlooked these violations. When the surveillance unit referred violations to the investigative unit, investigators failed to examine the full extent of the misconduct.
  • Discipline for Trading Ahead and Interpositioning Violations. The NYSE routinely failed to discipline trading misconduct or impose adequate sanctions, even where compelling evidence of these violations existed.

The SEC found that the NYSE violated Section 19(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) by failing to enforce compliance with the Section 11(b) of the Exchange Act, Rule 11b-1 thereunder and NYSE Rules 92 and 104.10, which prohibit specialists from interpositioning and trading ahead of customer orders. Section 19(g) requires that each self-regulatory organization enforce compliance by its members with the Exchange Act, the rules and regulations thereunder and the self-regulatory organization’s own rules, absent reasonable justification or excuse. Without admitting or denying the SEC’s findings, the NYSE has agreed to:

  • implement several significant remedial measures designed to strengthen the NYSE’s oversight of specialists and other floor members;
  • commit to an undertaking of $20 million to fund four regulatory audits of the NYSE’s regulatory program, each of which must occur every two years through the year 2011; and
  • implement a pilot program for video and audio surveillance on its trading floor for at least 18 months.

The SEC also instituted enforcement actions against 20 former NYSE specialists for trading ahead and interpositioning violations, claiming willful violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 11(b) of the Exchange Act and Rules 10b-5 and 11b-1 thereunder, and NYSE Rules 104, 92, 123B, and 401. 

In re New York Stock Exchange, Inc., SEC Release No. 34-51524 (Apr. 12, 2005); Commission Institutes Administrative Cease-and-Desist Proceeding Against 20 Former New York Stock Exchange Specialists, SEC Release Nos. 33-8566, 34-51525 (Apr. 12, 2005). 

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

NASD Settles IPO Allocation and E-Mail Retention Case With Member Firm

April 8, 2005 1:23 PM
The NASD announced that a broker-dealer firm has agreed to pay a fine of $1.75 million to settle NASD charges of allegedly improper IPO allocation practices and e-mail retention violations. The firm did not admit or deny the charges. NASD found that the firm “failed to observe the high standards of commercial honor and just and equitable principles of trade” by accepting what it found were unjustifiably high commissions (in some cases, more than $1 per share) from certain institutional customers within one day of allocating shares of “hot” IPOs to those customers. The alleged commission payments were paid in connection with institutional sized agency trades in highly liquid securities and exceeded by far the firm’s typical rate for such transactions. In addition, NASD found that the firm violated NASD recordkeeping rules by failing to ensure that e-mails from a three-year period were maintained for at least three years. The NASD said that the firm’s system permitted employees to permanently delete e-mails, and that the firm did not have an adequate mechanism to save internal e-mails of associated persons.


Thomas Weisel Partners to Pay $1.75 Million to Settle NASD Charges of IPO, E-Mail Retention Violations, NASD News Release (March 30, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

NASD endorses web-based point of sale mutual fund disclosure

April 8, 2005 1:18 PM

The NASD has submitted a letter to the SEC commenting on the SEC’s proposed point of sale disclosure rules. The NASD letter discussed the findings and conclusions contained in two reports, which were also submitted to the SEC: (1) the report of the NASD’s Mutual Fund Task Force on mutual fund distribution, which considered issues relating to soft dollars, mutual fund portfolio transaction costs, and distribution arrangements; and (2) the report of an investor research firm regarding point of sale disclosure forms proposed by the SEC and NASD, including investor feed-back.

The NASD recommended that the SEC require broker-dealers to provide potential investors with a “Profile Plus” document designed by the Mutual Fund Task Force. The Profile Plus is described in the Mutual Fund Task Force Report as a “two-page, easy to understand document that includes key characteristics of the fund and all fees and expenses of the fund, including costs and potential conflicts associated with mutual fund distribution.” Broker-dealers would be required to provide the Profile Plus document on their websites and to refer customers to that disclosure, unless an investor opts out of this form of delivery. The NASD recommended that the SEC require that a registered representative refer customers to the Profile Plus document at the time he or she makes a recommendation to purchase a fund.

The Profile Plus document would contain the following disclosures:

  • Basic information about the fund’s investment strategies and risks, with hyperlinks to additional information in the prospectus;
  • A ten-year performance chart to illustrate the volatility of the fund’s shares;
  • Average returns of the fund over the past 1-, 5-, and 10-year periods;
  • The total fees and expenses paid by a shareholder both transaction fees and fund operation expenses, presented in dollar and percentage terms, based on $1,000, $50,000, and $100,000 hypothetical investments – with a hyperlink to further detail in the prospectus;
  • A brief explanation of portfolio transaction costs, with a hyperlink to detailed information about the fund’s portfolio transaction costs; and
  • Basic information about revenue sharing and differential compensation arrangements, with hyperlinks to additional information in a dealer disclosure statement.

The Mutual Fund Task Force also recommended that the SEC consider other measures relating to mutual fund distribution, including changing the Rule 12b-1 provisions regarding board findings, changing the fee table description of Rule 12b-1 fees in mutual fund prospectuses, mandating better disclosure regarding the cost of Class B shares, and reconsidering the SEC staff’s unified fee proposal from the 1992 Protecting Investors report.

Letter from Robert R. Glauber, Chairman and CEO, NASD, to Jonathan G. Katz, Secretary, SEC (March 31, 2005); Applied Research & Consulting LLC, Mutual Fund Point of Sale Disclosure Investor Research Findings (March 23, 2005); Mutual Fund Task Force, Report of the Mutual Fund Task Force: Mutual Fund Distribution (2005). All are available at http://www.sec.gov/rules/proposed/s70604/nasd033005.pdf.

 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Federal District Court permits suit against an insurance company for implementing anti-market timing measures

April 8, 2005 1:16 PM
Plaintiff filed suit against an insurance company alleging breach of contract, among other things, after the insurance company amended the insurance policy to permit only written instructions for the purchase, redemption or exchange of underlying mutual funds. Plaintiff claimed that he had purchased the insurance policy as a vehicle for investment in mutual funds in reliance on the company’s representation that he would be permitted to execute immediate orders by telephone for transactions in mutual fund shares. The insurance company filed a motion to dismiss the complaint. However, on March 1, 2005, the United States District Court for the District of Massachusetts ruled in favor of the investor, finding that his complaint stated a valid claim for breach of contract (as well as certain other claims) under Massachusetts law. Accordingly, the defendant’s motion to dismiss these claims was denied.


Linton v. New York Life Insurance and Annuity Corp., No. 04-11362-RWZ (D. Mass. Mar. 1, 2005) (mem.), available at http://pacer.mad.uscourts.gov/dc/opinions/zobel/pdf/nylifeins%20-%20motion%20to%20dismiss.pdf; Most Mass. Claims Over Eliminating Telephone Orders Allowed to Proceed, BNA Securities Law Daily (April 1, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

What’s Good For the Goose . . .

April 1, 2005 1:50 PM
The SEC recently received a dose of its own medicine, courtesy of the General Accounting Office. As part of its audit of the SEC’s 2004 financial statements, the GAO reviewed the SEC’s information systems controls and found that the SEC had not implemented controls that effectively protect the integrity, confidentiality, and availability of its financial and sensitive data. Because of the controls’ ineffectiveness, risks to data include the data being disclosed or modified without authorization, or lost permanently, and possibly without detection. Furthermore, weak internal controls may enable parties with malicious intent to gain access to sensitive information and possibly engage in fraudulent or disruptive activities. The categories of sensitive data that the GAO specifically mentioned were at risk included payroll and financial transactions, personnel data, and regulatory and other mission critical information.

The GAO determined that “the SEC had not fully (1) assessed its risks, (2) established or implemented security policies, (3) promoted security awareness, [or] (4) tested and evaluated the effectiveness of its information system controls. The GAO noted that the SEC had recently taken some actions that improved the security of its information systems, such as the establishment of a central security management function and the appointment of a senior information security officer but recommended that the Commission take additional steps to ensure it implements effective controls.

United States General Accounting Office, Information Security: Securities and Exchange Commission Needs to Address Weak Controls over Financial and Sensitive Data (March 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

No Private Right of Action Under Investment Company Act Section 36(a)

April 1, 2005 1:45 PM
A U.S. District Court granted a motion to dismiss a class action lawsuit alleging that an investment adviser violated its fiduciary duties in violation of Section 36(a) of the1940 Act, finding that Section 36(a) does not provide a private right of action. In this case, the plaintiffs were investors in a fund that the adviser managed, and had alleged that the adviser’s creation of a rights offering, which was filed with the SEC, was meant to “coerce shareholders into increasing their investment in the funds” so that the adviser could collect higher fees. The plaintiffs also alleged that the rights offering lowered the value of their funds shares.

The court said that the Second Circuit’s precedent surrounding the existence of a private right of action under Section 36(a) “is somewhat in flux,” and briefly discussed the general issue of private rights of action. Although some federal courts have, in the past, been willing to find that the Investment Company Act contained implied private rights of action, the court said that these cases belong to the past. The courts now emphasize the importance of the statutory text in determining whether Congress created a private right of action. Applying factors outlined in the case of Olmstead v. Pruco Life Ins. Co. of New Jersey , 283 F.3d 429 (2d Cir. 2002), the court found that the language of Section 36(a) specifically authorizes only the Commission to bring an action and that the legislative history of Section 36(a) does not strongly suggest that, despite the textual language, Congress intended to provide a private right of action.

Chamberlain v. Aberdeen Asset Management, 2005 WL 195520 (E.D.N.Y. 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Sarbanes-Oxley Does Not Revive Expired Private Securities Fraud Claims

April 1, 2005 1:41 PM
The Second Circuit issued an unpublished summary order affirming that § 804 of the Sarbanes-Oxley Act (“SOX”) does not retroactively apply to revive claims that were filed after SOX became law but which had previously expired. SOX Section 804 increased the statute of limitations for bringing a private securities fraud action to two years after discovery of the facts constituting the violation and five years after the violation occurred. Previously, the statute of limitations was one and three years, respectively.

In this case, AIG Asian Infrastructure Fund LP v. Chase Manhattan Asia Ltd. , 2d Cir., No. 04-2403 (2005), an action was filed after SOX became law and after the limitations period for the claim had expired under the previous statute of limitations. The Second Circuit affirmed the lower court’s holding that “Section 804 does not revive expired claims,” noting that the facts in this case were indistinguishable from those of a similarly-decided case.

BNA Securities Daily, March 24, 2005.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

NASD Fines Three Brokerage Firms For Sales of Class B and C Shares

April 1, 2005 1:39 PM
The NASD fined three broker-dealer firms a total of $21.25 million for alleged suitability and supervisory violations related to their recommendations that investors purchase Class B or Class C shares of mutual funds. All firms settled with the NASD without admitting or denying the NASD’s allegations. According to the NASD, the firms allegedly recommended purchases of Class B and/or Class C shares of mutual funds without consistently or adequately disclosing or considering whether an equal investment in Class A shares would have provided customers with a higher overall rate of return. Further, the NASD alleged that the three firms had inadequate supervisory and compliance policies and procedures as applied to the sale of Class B and/or C shares.

As part of the settlement, the three firms agreed to a remediation plan under which they will provide certain customers with an opportunity to convert of their investments to Class A shares as if they had originally purchased such shares. In certain cases, customers will be offered a cash settlement..

NASD Fines Citigroup Global Markets, American Express and Chase Investment Services More than $21 Million for Improper Sales of Class B and C Shares of Mutual Funds, NASD News Release, March 23, 2005.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Revenue Sharing Case Settled

April 1, 2005 1:37 PM
A broker-dealer agreed to settle an SEC administrative action relating to its receipt of revenue sharing payments from mutual fund complexes whose shares it sold. The firm agreed to pay $450,000 in disgorgement and penalties without admitting or denying the underlying allegations.

The SEC alleged that the firm’s revenue sharing program charged participating mutual fund complexes a fee that ranged from $10,000 to $45,000 annually in exchange for varying levels of benefits, including shelf space and heightened visibility in the firm’s retail network. According to the SEC, the broker-dealer did not adequately disclose the existence of the revenue sharing program and the amount revenue sharing payments it received to its customers. The SEC said that although the broker relied upon disclosures provided in the funds’ prospectuses and statements of additional information, these disclosures were not sufficient to enable the customers to appreciate the conflict of interest involved with the revenue sharing program. The SEC said that the broker therefore willfully violated Section 17(a)(2) of the 1933 Act and Rule 10b-10 under the 1934 Act.

In addition to the monetary penalty, the broker-dealer agreed to comply with certain undertakings, including providing certain disclosures, and retaining an independent consultant to review its disclosures, policies and procedures relating to revenue sharing.

In the Matter of Capital Analysts Inc., Securities Act Release No. 8556 (March 23, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Broker-Dealer Settles Matter Concerning Revenue Sharing and Class B Share Sales

April 1, 2005 1:35 PM
A broker-dealer settled an SEC administrative proceeding alleging that it failed to adequately disclose to customers certain material information in connection with the offer and sale of mutual fund shares. Without admitting or denying the allegations, the firm agreed to pay a $20 million civil penalty and comply with certain undertakings.

The SEC asserted that the broker received revenue sharing payments from investment advisers and distributors associated with mutual fund complexes in return for giving the funds access to the broker’s sales network and increased visibility within that network. The SEC recognized that the broker did not give the revenue sharing payments to its registered representatives or branch managers, or provide them with increased payouts or bonuses related to revenue sharing. However, the SEC said that the revenue sharing program created an undisclosed conflict of interest because the firm offered and sold to its customers only shares of funds whose advisers or distributors agreed to make such payments. The SEC said that the broker relied upon disclosures made in the funds’ prospectuses and statements of additional information, but the SEC claimed that those disclosures did not provide sufficient information to enable the customers to understand the nature and scope of the revenue sharing program. The SEC said that the broker willfully violated Section 17(a)(2) of the Securities Act of 1933 (“1933 Act”) and Rule 10b-10 under the Securities Exchange Act of 1934 (“1934 Act”).

The SEC also alleged that the broker-dealer recommended and sold Class B shares of mutual funds to certain customers who, depending on their circumstances, might have benefited by purchasing Class A shares instead due to the availability of breakpoints in the front-end sales charges and lower annual expenses associated with the Class A shares. The SEC claimed that although the broker had written policies requiring its representatives to provide certain disclosures to customers regarding Class B shares, these procedures were not sufficient to ensure that representatives provided all of the required disclosures other than the fund’s prospectus. The SEC found that the broker willfully violated Section 17(a)(2) of the 1933 Act, noting that there is no requirement for the firm to be aware of the violation in order to find that it was willful.

In addition to the monetary penalty, the broker-dealer agreed to comply with a number of undertakings, including providing certain disclosures, hiring an independent consultant to review its disclosures, policies and procedures relating to revenue sharing and the sale of different share classes and to make recommendations regarding them, providing certain customers who purchased Class B shares an opportunity to convert those shares to Class A shares as if they had purchased them originally, and providing for the payment of cash settlements to certain customers who purchased Class B shares.

In the Matter of Citigroup Global Markets, Inc., Securities Act Release No. 8557 (March 23, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Fund Manager Settles Directed Brokerage Enforcement Action

April 1, 2005 1:31 PM
A mutual fund manager has settled an SEC administrative action alleging that the adviser failed to fully disclose material facts, including conflicts of interest, arising from an arrangement it had to direct fund brokerage commissions to certain broker-dealers in return for increased visibility within the brokers’ distribution systems. According to the SEC, the adviser and the fund’s distributor entered into arrangements with over eighty brokers to promote the sale of the funds, and that over sixty of these brokers received directed commissions from fund portfolio transactions based on fund sales or retention of fund assets over a four-year period. While it neither admitted or denied the SEC’s findings, the adviser agreed to pay a $40 million civil penalty and disgorgement of $1.

The SEC asserted that the directed brokerage arrangements enabled the adviser to avoid using its own assets to pay for these marketing expenses. The SEC claimed that the adviser’s arrangements violated the adviser’s own policies permitting the placement of portfolio trades in recognition of fund sales. The SEC also said that the adviser did not fully and effectively communicate its directed brokerage arrangements, or the potential conflicts of interest, to the fund board of trustees. Finally, the SEC asserted that the adviser did not adequately disclose the directed brokerage practices to fund shareholders. The SEC said that the funds’ prospectuses and statements of additional information stated only that the adviser considered the sale of fund shares as a factor in selecting broker-dealers to execute the fund’s transactions. The SEC stated the disclosure documents did not make the distinction between this and paying for negotiated arrangements with brokerage commissions.

The SEC concluded by saying that the adviser willfully violated Section 206(2) of the Investment Advisers Act of 1940 and Section 34(b) of the Investment Company Act of 1940. In addition to the monetary penalties described above, the adviser agreed to comply with certain undertakings relating to portfolio trading procedures, revenue sharing arrangements, disclosure, and reports to the funds’ board.

In the Matter of Putnam Investment Management, LLC, Investment Advisers Act Release No. 2370 (March 23, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

SEC To Act on Fee-Based Brokerage and Regulation NMS Proposals

April 1, 2005 1:29 PM
The SEC has announced that it will hold an open meeting on April 6, 2005 at 10:00 am, at which it will consider adopting the re-proposed fee-based brokerage rule under the Investment Advisers Act of 1940, and proposed Regulation NMS.

SEC News Digest, March 31, 2005.
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Meyer Eisenberg Appointed Acting Director of IM

April 1, 2005 1:27 PM
The SEC has announced that Meyer Eisenberg, Deputy General Counsel of the SEC, has been appointed Acting Director of the Division of Investment Management.

SEC Press Release No. 2005-46 (April 1, 2005).
 
 



This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.