The CFA Institute set new provisions for the Global Investment Performance Standards (“GIPS”) for investment firms that offer wrap fee portfolios or separately managed accounts (“SMAs”). The GIPS standards provide global, voluntary ethical standards used to calculate and present the performance of investment firms, and the new GIPS wrap fee/SMA standards specifically set a global method to calculate and report firms’ investment performance results to potential wrap fee program investors. The new standards are designed to ensure fair representation and full disclosure, and to help investors in wrap programs to see the impact of the fees on their total returns.

Beginning on January 1, 2006, the new GIPS wrap fee/SMA provisions will replace the AIMR Performance Presentation Standards (“AIMR-PPS”) that provide guidance for U.S. and Canadian firms that offer wrap fee programs. No historical performance data is required before this date. Some changes are necessary for firms that are compliant with AIMR-PPS. Among other requirements, the new standards require firms to include all wrap accounts in composites, disclose a schedule of the current fees charged for the wrap fee product, present performance on a “net-of-fees” basis, and maintain records to support the performance calculation. Firms also may present fees on a “gross-of-fees” basis so that investors receive a full picture of the fees’ impact. Firms will have more options for calculating and presenting performance results, and the new standards provide several samples and applications to assist firms’ adherence. The CFA Centre for Financial Market Integrity, an arm of the CFA Institute, and 23 other investment organizations worldwide sponsored the new GIPS standards.

CFA Institute, Wrap Fee/Separately Managed Account (SMA) Provisions and Guidance for the GIPS Standards (Aug. 10, 2005), available at https://www.cfainstitute.org/cfacentre/ips/pdf/WrapFeeSMAGSBoardApprovedFINAL.pdf (last viewed Aug. 24, 2005); CFA Press Release, CFA Centre Issues Global Standards for Wrap Fee/Separately Managed Accounts to Enhance Disclosures to Investors (Aug. 15, 2005).

The ICI made several recommendations regarding various regulatory concerns to the SEC in a letter to the Commission earlier this month. The ICI requested that the SEC review mutual fund disclosure, and consider allowing a mutual fund to use a shorter disclosure document and post additional, more detailed disclosures on the Internet. The ICI urged the SEC to adopt the proposed “Hard 4 Close” rule requiring mutual fund orders to be submitted to the fund by 4 p.m. eastern standard time, as well as to address concerns that the new redemption fee rule places all of the responsibilities on funds without addressing the duties of intermediaries and that requiring funds to have agreements with intermediaries is unworkable. The point-of-sale disclosure rule that requires broker-dealers to provide information at the point-of-sale of mutual fund shares and in trade confirmations also requires immediate consideration, the ICI emphasized. The ICI also recommended that the SEC solicit comments regarding the soft dollar safe harbor and e-mail retention policies for investment advisers. Other third-party administrators of retirement plans also should be subject to the proposed transfer agent registration requirements that would apply to mutual funds and broker-dealers, the ICI also suggested. Finally, the ICI asked the commission to ensure that it fully considers the economic consequences of any rules that it adopts, and called for the “coordination of mutual fund-related issues among the divisions that are responsible” including OCIE and the SEC’s regional offices.

BNA Securities Law Daily, ICI Urges Comprehensive Review by SEC of Mutual Fund Disclosure (Aug. 15, 2005).

An investment firm agreed to pay a $125,000 fine, disgorge $46,500, and pay $46,281 in restitution for allegations that it facilitated market-timing practices. The firm also was censured, and agreed to certify to the NASD that it reviewed and revised its market timing and e-mail retention procedures. The NASD alleged that the firm, through a registered representative, enabled a hedge fund client to engage in frequent and abusive trading in sub-accounts of variable annuities without detection. Additionally, after the firm received written notice that the fund’s trading was “disruptive and contrary to the interest of long-term investors,” the firm continued to permit these practices. The NASD also found that the firm did not have adequate supervisory procedures for market timing activity and failed to preserve e-mail communications. The firm neither admitted nor denied the charges.

NASD, Disciplinary and Other NASD Actions, LaSalle Street Securities, LLC (Aug. 2005).

The NASD confirmed that it is scrutinizing hedge fund sales to individual investors. Barry Goldsmith, the NASD’s chief of enforcement, stated that the NASD has been and will continue to focus on the marketing and sales of hedge funds to individuals, but the NASD would not release a copy of a letter of inquiry to firms. Industry sources report that the NASD has begun a “mini-sweep exam” of hedge fund sales practices that focuses on the disclosures that are made to retail investors, sales incentives that hedge funds pay to brokers, and suitability issues when funds are too risky for a particular investor or a share class is recommended based on sales compensation and not the investor’s best interests. The inquiry letters reportedly concern sales back through the beginning of 2004, and focus on funds with investment minimums of $50,000 or less. Similarly, the Ontario Securities Commission is examining the hedge fund industry in Canada, including suitability requirements and sales practices to small retail investors, and plans to tighten hedge fund regulations.

BNA Securities Law Daily, NASD Enforcement Chief Confirms Interest in Hedge Fund Sales to Individuals (Aug. 19, 2005); www.bloomberg.com; Wojtek Dabrowski, Hedge fund overhaul coming, canada.com News (Aug. 25, 2005).

The NYSE entered into a consent agreement with an investment firm that was censured, fined $10 million, and required to retain an independent consultant to report on the firm’s customer complaint reporting policies. Among its violations, the firm allegedly failed to deliver prospectuses to customers concerning 64,000 transactions in conjunction with sales of registered mutual fund securities and concerning 900 transactions in auction rate preferred stocks. The firm also allegedly failed to preserve or retain e-mail, delayed its registration with the Exchange’s Electronic Filing Platform, and failed to ensure that almost 900 of its employees maintained proper securities industry registrations. Finally, the firm did not report several litigation and arbitration judgments, “comply with an undertaking that arose as a result of a 2000 disciplinary action,” or update employee information in the central personnel database for the securities industry.

NYSE Press Release, NYSE Regulation Fines Merrill Lynch $10 Million for Failure to Deliver Customer Prospectuses, Among Other Supervisory and Operational Failures (Aug. 15, 2005).

The SEC is inquiring whether there are any conflicts or insider trading violations when a mutual fund or other investment firm pays a doctor to provide advice to the firm regarding medical companies and products. Funds pay medical professionals directly, or pay matchmaking companies annual subscription fees to match the funds with specialists in a particular business sector, and the matchmaking company solicits, assigns and compensates the experts. This practice is particularly popular in the medical sector, with almost 10% of the country’s doctors participating in matchmaking programs. The SEC is concerned that the matchmakers and funds seek doctors that perform clinical research for biotech firms to get information about confidential trials. Some matchmakers attempt to address this concern by requiring doctors to sign an agreement not to violate their confidentiality agreements and by allowing funds’ compliance officers to submit lists of the companies in their portfolios to ensure that the doctor providing advice does not work for a company in the fund’s portfolio. The FDA and the SEC have increased information sharing, and the FDA announced that questions about the integrity of clinical research could affect whether the FDA approves new drug applications.

Stephanie Saul and Jenny Anderson, Doctors’ Links with Investors Raise Concerns, N.Y. Times, August 16, 2005, at A1; Ignites, SEC Eyes Medial Consulting for Conflicts (Aug. 16, 2005).

The NASD fined a financial services firm $675,000 for allegedly committing fraud and misrepresentations by failing to disclose revenue sharing arrangements, and required the firm to undertake remedial measures including updating its policies, procedures and training, immediately making disclosures on its website about its conflicts of interests, and retaining an independent consultant. The NASD also censured the firm’s President, CEO, founder and primary owner, fined him $25,000, and suspended him for 30 days from acting in a supervisory capacity for allegedly failing to supervise the firm’s revenue sharing activities. The firm and its President consented to the entry of the NASD’s findings but did not admit or deny the charges.

The NASD found that the firm directed most of its sales to a single “preferred supplier” for each of its products in exchange for marketing fees and special cash compensation. The firm directed its brokers to focus their sales on the preferred suppliers’ products, the brokers directed 81-99% of their sales of each product to the designated suppliers, and the firm collected $4.2 million in marketing fees that included revenue sharing payments for sales of these preferred products. Yet the firm failed to disclose these conflicts to clients and instead represented itself as an independent, unbiased firm with a wide selection of suppliers. Additionally, the firm recommended that customers refinance home mortgages through its affiliated mortgage broker without properly disclosing its relationship with the broker and the fees that the firm received for it recommendations.

NASD Press Release, NASD Fines Hantz Financial $675,000 for Fraud, Misrepresentations Related to Undisclosed Revenue Sharing Agreements (Aug. 11, 2005).

The NASD issued a Notice to Members providing guidance for supervising the sale of unregistered equity indexed annuities (“EIAs”), which are financial instruments that provide a guaranteed interest rate and some protection from loss of principal, while also providing additional interest based on a securities market index’s performance. Some EIAs are registered as securities under the Securities Act of 1933, and their sales are supervised according to the requirements of NASD Rule 3040 for private security transactions. Other EIAs are not registered, based on the exemption for insurance products under Section 3(a)(8) of the Securities Act and Rule 151 thereunder, in which case firms treat their sales as an outside business activity that does not require the firm’s supervision under NASD Rule 3030. Due to the uncertainty of whether a particular EIA must be registered, firms’ treatment of EIAs varies.

Without taking a position on the question of whether a particular EIA would be considered a security, the NASD suggested that firms: (1) maintain a list of acceptable unregistered EIAs and only allow their associate persons to sell other EIAs if the brokers notify the firm in writing of the intended sale and receive written confirmation from the firm that the sale is acceptable; (2) consider implementing additional supervisory procedures to protect the firm’s customers, such as requiring all sales of unregistered EIAs to be processed through the firm, and supervising the marketing material, suitability analysis and other sales practices; and (3) provide training to associated persons that sell unregistered EIAs about the suitability of these products for customers. The NASD also reminded firms that the NASD suitability rules apply to recommendations that a customer sell a registered security to buy an unregistered EIA.

NASD Notice to Members 05-50 (Aug. 2005); NASD News Release, NASD Issues Guidance Regarding Equity Indexed Annuity Sales (Aug. 8, 2005).

A discount retailer sued a hedge fund and a stock research firm, as well as two of the fund’s principals and the research firm’s co-founders in a California state court for allegedly conspiring to drive down the plaintiff’s stock price in order to benefit the hedge fund’s short positions. The plaintiff alleged that the research fund colluded with the fund and possibly other hedge funds to draft and issue negative research reports about the plaintiff and time the release of the reports in order to drive down the plaintiff’s share price and benefit from short positions in the plaintiff’s stock. The plaintiff is seeking an injunction against these alleged practices, restitution for the sales lost in public offerings and decline in the company’s market capitalization, attorneys’ fees, prejudgment interest, and damages for alleged negligence.

MARHedge, Overstock.com sues Rocker Partners over short-selling (Aug. 15, 2005), available at http://www.marhedge.com/news/Cover.Hedge.asp?s=HedgeH-2005-08-14-12-01-05p1.htm.

The U.S. Court of Appeals for the District of Columbia Circuit granted the U.S. Chamber of Commerce’s motion to stay the requirements under the SEC’s fund governance rule, which provides that at least 75 percent of a fund’s directors and its chairman be independent of the fund’s investment manager in order for the fund to take advantage of certain exemptive rules under the Investment Company Act of 1940. The Chamber filed the emergency action to stay, or for expedited briefing, after the SEC re-adopted the challenged provisions on June 29, in response to the Court’s June 21 remand of the challenged provisions to the SEC for further consideration of the costs and alternatives. The Court also granted the Chamber’s motion for expedited briefing, and directed the parties to address in their briefs whether the SEC had the authority to act on the Court’s remand before the Court issued its mandate.

U.S. Chamber of Commerce v. SEC, D.C. Cir., No. 05-1240 (Aug. 10, 2005).

The SEC announced that it will expand its voluntary eXtensible Business Reporting Language (“XBRL”) program to allow mutual funds to file exhibits to their annual reports and quarterly statements of portfolio holdings using XBRL, which turns text-based information into documents that are retrievable, searchable, and able to be analyzed by automated processes. This program is currently available for commercial and industrial companies, banks, and insurance companies. Mutual funds that choose to participate will be able to file XBRL exhibits using the US GAAP Investment Management classification system. The purpose of the program is to help the SEC to assess whether the XBRL system helps individual investors to retrieve information more quickly and easily in order to help them to make better-informed comparisons and to choose investments more wisely.

SEC Press Release, SEC XBRL Voluntary Program Extends to Investment Companies (Aug. 8, 2005).

The SEC filed an action in the United States District Court for the Southern District of New York against former executives of a financial services firm and its affiliated investment adviser, alleging that the executives aided and abetted the firm and the adviser in relation to alleged violations of Sections 206(1) and 206(2) of the Advisers Act. This action follows the SEC’s settlement with the firm. The SEC seeks to enjoin the executives from violating or aiding and abetting violations of the Investment Advisers Act of 1940, to require disgorgement of any ill-gotten gains, and to impose civil penalties.

In this complaint, the SEC alleged that the former chairman and CEO of the firm’s asset management division directed the negotiations for and approved arrangements for transfer agent services with the knowledge that the affiliated transfer agent would reap large profits each year for performing few services, approved a materially misleading memo about these arrangements for the funds’ boards of directors, knew or was reckless in knowing that the materials provided to the funds’ boards were misleading, and failed to disclose to the boards the amount of profit that the affiliated transfer agent would make as a result of these arrangements. The SEC also alleged that another former executive of the adviser, who also served as the treasurer and chief financial officer for the funds, negotiated the deal with the third party transfer agent, and was responsible for making the presentation to the funds' boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds' best interests.

SEC v. Jones, Litigation Release No. 19330 (Aug. 8, 2005).

The SEC filed a complaint for injunctive relief, disgorgement and penalties against a hedge fund portfolio manager and a second defendant for violations of Section 17(a) of the Securities Act of 1933 Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under the 1934 Act based on conduct in their previous employment as senior executives of an institutional brokerage firm. The complaint alleges that the defendants engaged in a fraudulent scheme designed to conceal the manner in which trades were processed, and that, in doing so they failed to provide best execution. The offending conduct includes both improper acts and failure to supervise.

The scheme involved using the brokerage firm’s role as market maker together with a pattern of delaying executions and obscuring this manner of trading to create trading profits for the firm at the customer’s expense far in excess of reasonable and customary compensation for trades executed by a market maker on a net basis. The SEC alleges that the defendants themselves shared in these excessive profits, and that the defendants made material misstatements or omissions to the marketplace concerning the quality of order execution at their firm.

The SEC also alleged that the defendants failed to properly supervise institutional traders. Because the executives reviewed trade and exception reports they knew or were reckless in not discovering that sales traders systematically misused Automated Confirmation Transaction Service (“ACT”) modifiers that (a) resulted in untimely trades, (b) allowed certain traders to record inaccurate execution times, (c) compromised disclosure to clients and (d) allowed traders to circumvent limit order protection protocols.

The SEC is also alleging liability for aiding and abetting violations by the broker-dealer and control person liability under Section 20(a) of the 1934 Act for violations previously charged and settled against the broker-dealer. In December 2004, the broker-dealer consented to findings that it willfully violated the 1034 Act’s books and records provisions and failed to supervise employees with a view to preventing violations of Sections 15(c) and 17 (a) and Rule 17a-3(a)(1). Earlier this year, one of the firm’s principal traders, and a brother of one of the defendants, settled SEC and NASD charges by consenting to disgorgement and penalties totaling more than $3.25 million and permanent injunctions against associating with a broker-dealer and future violations of Sections 17(a) and 10(b).

SEC v. Pasternak, Litigation Release No. 19329 (Aug. 8, 2005).

The Managed Funds Association (“MFA”), a trade association for professionals specializing in alternate investment strategies, such as hedge funds, funds of funds and managed futures funds, published its 2005 Sound Practices for Hedge Fund Managers (“2005 Sound Practices”). The 2005 Sound Practices is intended to provide recommendations for managers that operate “single manager” hedge funds, and is an update to previously published versions in 2000 and 2003. The publication was originally produced in response to the President’s Working Group on Financial Markets’ recommendation in 1999 that hedge funds establish sound practices for risk management and internal controls. The 2005 Sound Practices includes a new section, transactional practices, and expanded coverage for all of the sections, including internal trading controls, risk monitoring, valuation policies and procedures, responsibilities to investors, regulatory controls, and business continuity and disaster recovery. It also contains guidance for developing anti-money laundering policies, a list of regulatory filings that may be applicable to hedge fund managers, and checklists for developing compliance manuals and codes of ethics for hedge fund managers.

News Release, Managed Funds Association, MFA’s 2005 Sound Practices for Hedge Fund Managers is Released Today (Aug. 2, 2005). MFA’s 2005 Sound Practices for Hedge Fund Managers (Aug. 2, 2005), available at http://www.mfainfo.org/images/PDF/MFAs_2005_Sound_Practices_FINAL.pdf (last visited Aug. 11, 2005).

The NASD fined a member brokerage firm (“Firm”) $1.5 million and ordered the Firm to pay over $4.6 million to 3,549 customers in restitution for the failure to adequately monitor the appropriateness of its fee-based brokerage accounts. To determine the penalties, the NASD “took into account the firm’s demonstrable steps…to enhance its system and procedures” shortly after the NASD began its inquiry. The Firm neither admitted nor denied the charges.

The NASD alleged that although the Firm recognized and instructed its brokers that fee-based brokerage accounts are not appropriate for all customers and required a minimum of eligible assets to open such an account, the Firm failed to adequately reassess whether fee-based brokerage accounts remained appropriate for these customers. The customers receiving restitution did not conduct any trades in their accounts for two consecutive years or had accounts with assets below $25,000 for one full year, but the Firm continued to allow these customers to maintain a fee-based account without a reevaluation. When the Firm began to monitor the appropriateness of fee-based accounts by providing branch managers with exception reports based on a suppressed-commission-to-fee-ratio, the NASD found that the Firm’s “system and procedures were still fundamentally flawed” because the exception reports did not capture accounts that had less than the minimum of eligible assets required to open a fee-based account. The NASD Vice chairman said, “firms have an obligation to their customers to periodically reassess whether a fee-based account…remains appropriate. Firms must have procedures in place that adequately evaluate the continued appropriateness of these accounts for their customers.”

News Release, National Association of Securities Dealers, NASD Orders Morgan Stanley to Pay Over $6.1 Million for Fee-Based Account Violations (Aug. 2, 2005).

The U.S. District Court for the Southern District of New York dismissed a class action case brought by shareholders of certain mutual funds against the funds, their investment advisers, directors, officers and trustees, and the advisers’ parent company (collectively, “Defendants”). The shareholders alleged that (i) the advisers, officers and directors made material misstatements about payments made to brokers for marketing the funds in violation of Section 34(b) of the Investment Company Act of 1940, (ii) the funds’ distributor, advisers, officers and directors used investors’ assets to make undisclosed soft dollar and excessive commission payments to brokerage firms to induce them to aggressively market the funds in violation of Sections 36(a) and 36(b) of the Act, and (iii) the parent company caused these violations under Section 48(a) of the Investment Company Act. The shareholders also filed a derivative action against the advisers under Section 215 of the Investment Advisers Act and sought to rescind the investment advisory contracts and recover the advisory fees paid by the funds. Finally, the shareholders alleged that there were violations of Section 349 of the New York General Business law for “unfair and deceptive” misrepresentations, and various common law violations.

The Court dismissed the claims under Sections 34(b), 36(a), and 48(a), finding that these sections did not provide a private remedy for violations, holding that Congress did not intend a private right of action for the enforcement of these sections. The Court said that these provisions do not explicitly provide a private right of action and they do not contain “rights-creating language” but only describe prohibited actions. Additionally, the Court said that Congress provided an alternate method of enforcement for these provisions through SEC enforcement, and provided a private right of action under Section 36(b) of the statute. The Court also dismissed the claim under Section 36(b) because the shareholders did not allege any facts that the Defendants charged excessive fees and did not bring the claim against a recipient of the fee.

The Court dismissed the common law claims, finding that the shareholders should have brought these claims and the claims under Sections 36(a) and 48(a) derivatively because the shareholders’ claims only affected them indirectly and were not particular to any shareholder or group of shareholders. A claim must be brought as a derivative suit under Massachusetts law if the shareholder has not alleged an injury unique to the shareholder or a wrong involving one of the shareholder’s contractual rights as a shareholder. Thus, any claims arising from the misuse of the funds’ assets must be brought through a derivative action. The Court also dismissed the derivative action on behalf of the funds against the advisers, finding that the plaintiffs’ evidence was insufficient to excuse the demand requirement.

Finally, the Court dismissed the claims under the New York General Business law, saying that Section 349 does not apply to securities transactions. The Court also found that the common law claims should have been derivative claims and were preempted under the Securities Litigation Uniform Standards Act (“SLUSA”). SLUSA requires preemption if a claim is brought “in connection with the purchase or sale of a covered security.” The plaintiffs’ class definition includes persons who held shares of the funds at any time during the class period, including those class members who purchased and sold securities during the period. The Court held that because the plaintiffs alleged that the Defendants’ actions encouraged purchasers to buy the Funds’ shares, the claims of class members who purchased shares during the class period are inextricably related to their purchases of shares of those funds and are preempted by SLUSA. The complaint did not sufficiently identify and separate preempted and non-preempted subclasses, so the Court dismissed all of the common law claims.

In re Eaton Vance Mutual Funds Fee Litigation, No. 04 Civ. 1144 (JGK) (S.D.N.Y. 2005).

A mutual fund investor (“Plaintiff”) filed a class-action complaint against directors, advisors and affiliates of a mutual fund family (“Defendants”) for violations of Sections 36(a), 36(b) and 47(b) under the 1940 Act, and of state law. The Plaintiff alleged that the Defendants did not cause the mutual funds to participate in class action settlements when they were eligible to participate. The U.S. District Court for the Northern District of Illinois dismissed the Plaintiff’s claims, stating that the “plain statutory text of Section 36(a) provides a right of action only for the SEC.” The Court further stated that “there is simply no room to imply a private right of action under Section 36(a),” and that the Plaintiff failed to sufficiently allege “personal misconduct” because he did not allege self-dealing. Allegations of “general nonfeasance of a fiduciary duty” were insufficient. The Court also dismissed the Plaintiff’s Section 36(b) claim, finding that the Plaintiff’s “real complaint” was not the terms of the compensation agreement, which would be within the purview of Section 36(b), but fund management issues. The Court found that the Defendant’s alleged failure to participate in settlement agreements for which the funds were eligible were management concerns solely within the purview of Section 36(a).

Jacobs v. Bremner, 2005 U.S. Dist. LEXIS 14762 (N.D.Ill. 2005).

The SEC denied the application by a former employee of an investment adviser for an award of fees and expenses under the Equal Access to Justice Act (“EAJA”). EAJA enables applicants who have prevailed against the government in an adversary proceeding to recover their fees and expenses unless “the position of the agency was substantially justified.” In an earlier proceeding alleging that the employee had aided and abetted the adviser’s soft-dollar violations, the SEC overruled an administrative law judge’s decision and dismissed the charges against the employee, holding that the evidence did not support a finding of liability. The employee filed a claim for reimbursement of legal fees and expenses. A law judge found that the Division of Enforcement’s case against the employee was substantially justified, and denied reimbursement. The SEC agreed, finding that “an agency position can be substantially justified even if the trier of fact finds the evidence insufficient to prove the violations alleged.” The SEC said that the evidence provided a reasonable basis for the Division’s position that the employee acted with knowledge of wrongdoing and provided substantial assistance for the adviser’s violation.

In the Matter of Clarke T. Blizzard, Investment Advisers Act Release No. 2409 (July 29, 2005).

For the first time, a Section 529 college savings plan has settled an SEC administrative proceeding brought against it. The SEC alleged that the plan violated Section 17(a)(2) of the Securities Act of 1933 by making misstatements to plan participants and potential participants about the misuse of investor funds by the plan’s former director. The former director had allegedly misappropriated certain unallocated gains from the plan, taking advantage of weaknesses in the plan’s internal controls. According to the SEC, the plan distributed information to participants that said that all earnings would be credited to individual participants’ accounts, but failed to notify participants of the existence of unallocated funds. The SEC also said that when the plan informed participants of the former director’s dismissal, it referred to the unallocated funds as administrative funds and claimed that participants were not harmed, whereas the misappropriated funds belonged to participants. The Plan neither admitted nor denied wrongdoing, but agreed to cease and desist from future securities law violations, to fully refund the participant accounts, and to take certain actions to correct the flaws in its systems, including retaining an independent consultant to assist them in establishing internal controls. The SEC also filed a civil action in the U.S. District Court for the District of Utah against the Plan’s former director and is seeking an injunction, disgorgement, and a civil fine.

In the Matter of Utah Educational Savings Plan Trust, Securities Act Release No. 8601 (Aug. 4, 2005); BNA Securities Law Daily, August 5, 2005.

The Public Company Accounting Oversight Board has adopted rules relating to tax services, contingent fees, and related ethics and independence standards for auditors. The rules identify three situations in which the provision of tax services would impair an auditor's independence. Rule 3521 treats registered public accounting firms as not independent of their audit clients if they enter into contingent fee arrangements with those clients. Rule 3522(a) treats a registered public accounting firm as not independent if the firm provides services related to marketing, planning, or opining in favor of the tax treatment of a transaction that is a confidential transaction (as defined in Rule 3501). Additionally, 3522(b) treats a registered public accounting firm as not independent if the firm provides services related to marketing, planning, or opining in favor of a tax treatment on a transaction that is based on an aggressive interpretation of applicable tax laws and regulations, including listed transactions as defined by the U.S. Treasury Department. Rule 3523 treats a registered public accounting firm as not independent if the firm provides tax services to members of management who serve in financial reporting oversight roles at an audit client or to immediate family of such individuals.

“Board Adopts Standard on Remediation of Material Weaknesses, Rules on Auditor Independence, and Tax Services”, available at http://www.pcaobus.org/News_and_Events/News/2005/07-26.aspx.

The SIA has petitioned the Commission to extend certain compliance dates for Investment Advisers Act Rule 202(a)(11)-1, the fee-based brokerage rule, from October 24, 2005 until April 1, 2006. The SIA requested this extension in order to seek further guidance from the Commission and the Staff on the application of the financial planning portion of the rule and to permit the industry to implement changes that will be necessary in order to comply with the financial planning and discretionary brokerage portions of the rule.

Letter of Ira D. Hammerman, Senior Vice President and General Counsel, SIA, to Jonathan Katz, Secretary, SEC, dated July 26, 2005.

The SEC approved New York Stock Exchange Rule 405A relating to non-managed fee-based accounts. The rule requires disclosure, monitoring and follow-up with respect to these types of accounts. Although the rule became effective immediately, the Exchange will allow member firms until September 22, 2005 to fully adopt and establish required procedural and systems changes.

NYSE Information Memo No. 05-51 (July 26, 2005).

The SEC has published proposed NASD Rule 2821, which would impose sales practice standards and supervisory requirements on members for transactions in deferred variable annuities. The rule would create recommendation requirements (including a suitability obligation), principal review and approval obligations, and supervisory and training requirements tailored specifically to transactions in deferred variable annuities. The proposed rule would apply to the purchase or exchange of a deferred variable annuity and the subaccount allocations, but not to reallocations of subaccounts after the initial purchase or exchange. The supervisory component of the proposed rule calls for members to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with standards set forth in the proposed rule.

SEC Release No. 34-52046A; File No. SR-NASD-2004-183 (July 19, 2005).

On July 26, the U.S. Chamber of Commerce asked the U.S. Court of Appeals for the District of Columbia Circuit to stay certain mutual fund governance rules recently re-adopted by the Commission. First adopted in June 2004, the provisions require that, in order for an investment company to take advantage of certain exemptive rules under the Investment Company Act of 1940, its chair as well as at least 75 percent of its directors must be independent of the fund's investment manager. In response to the Chamber's argument that the rules violated the Administrative Procedures Act, the court remanded the provisions to the Commission for further consideration on June 21. The disputed provisions were then re-adopted by the Commission on June 29. The Chamber now argues that irreparable harm will result if a stay is not granted, that the Chamber will likely prevail on the merits, that others will not be harmed by the stay, and that a stay will serve the public interest.

BNA Securities Law Daily, July 27, 2005.

On August 3, Christopher Cox was sworn in as chairman of the Securities and Exchange Commission.

SEC Press Release No. 2005-107 (Aug. 3, 2005).