Investment Management Industry News Summary - August 2008

Investment Management Industry News Summary - August 2008

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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D.C. Circuit Upholds Constitutionality of the Public Company Accounting Oversight Board  

August 29, 2008 12:53 PM  

On August 22, 2008, the U.S. Court of Appeals for the District of Columbia upheld the constitutionality of the Public Company Accounting Oversight Board (“PCAOB”). The 2-1 court decision upheld a lower court’s ruling in March 2007 that dismissed the plaintiffs’ lawsuit, filed in February 2006.
Appellants contended that Title I of the Sarbanes-Oxley Act of 2002 violates the Appointments Clause of the U.S. Constitution and separation of powers because, acting as an independent entity with broad executive powers, the structure of the PCAOB does not permit adequate Presidential control.

The Circuit Court held that, although PCAOB members are appointed by the SEC and not the President, charging the PCAOB with extensive authority on behalf of the United States alone does not equate to the requirement that the Board members themselves must be appointed by the President. The court noted that the PCAOB is “Cabinet-like” in that it exercises executive authority over a major aspect of government policy, but “heads of independent agencies need not be wholly controlled by the President so long as they are principal officers appointed (with the advice and consent of the Senate) and removable by the President.”

In his dissent, Judge Kavanaugh noted that PCAOB members can be removed for cause only by the SEC. Distinct from other heads of Cabinet-like agencies, Judge Kavanaugh noted that other agency heads cited by the majority can be removed for cause only by the President. Such a structural distinction, he emphasized, effectively eliminates any Presidential power to control the PCAOB.

Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, No. 07-5127 (D.C. Cir. Aug. 22, 2008) at 19.
The opinion of the D.C. Circuit is available at
http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf. Chairman Cox’s statement regarding the decision is available at http://sec.gov/news/press/2008/2008-180.htm.
 

 
 

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 Staff Rejects Providing Requested No-Action Relief Regarding a Proposed Offer and Sale of Bank Depository Instruments

August 29, 2008 11:19 AM  
On August 18, 2008, the staff of the SEC’s Division of Corporation Finance published a letter denying a request for no-action relief by a state association of commercial banks and savings and loan associations (“Association”) with respect to a proposed educational savings plan under involving bank certificates of deposit.
Under the proposed program, banks would issue certificates of deposit specially designed to conform to the conditions for a tax-advantaged college savings program, i.e., Section 529 of the Internal Revenue Code of 1986. The Association sought no action relief:
  • from the Division of Corporate Finance to allow the offer and sale of the bank certificate of deposits without registration of the certificates under the Securities Act of 1933 Act or the Securities Exchange Act of 1934 (the “Exchange Act”);
     
  • from the Division of Market Regulation, to allow banks to participate in the program without registering as broker-dealers under Section 15(a) of the Exchange Act; and
     
  • from the Division of Investment Management, to confirm that the Program would not be viewed as an issuer of a “security” within the meaning of Sections 2(a)(22) and 2(a)(36) of the Investment Company Act of 1940, and thus not an investment company as defined in Section 3(a).

In denying each of the above requests for no-action relief regarding the proposed offer and sale of bank depository instruments, the SEC staff noted that Section 529 of the Internal Revenue Code creates rights and obligations different from those of bank depository instruments. The SEC staff also distinguished other prior no-action letters from the relief requested by the Association because a participant in the proposed program would not be purchasing interests issued by a public instrumentality of the state but instead would be investing directly in bank depository instruments.

For more information, see the SEC no-action letter denying relief available at http://sec.gov/divisions/corpfin/cf-noaction/2008/missouribankers081808-2a1.htm and incoming letter available at http://sec.gov/divisions/corpfin/cf-noaction/2008/missouribankers111607-2a1-incoming.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.
 

SEC Votes to Publish for Public Comment a Proposed Roadmap Toward U.S. Development of Set of Global Accounting Standards

August 29, 2008 11:17 AM  

On August 27, 2008, the SEC voted unanimously to publish for public comment a proposed “roadmap” that could lead to the use of International Financial Reporting Standards (“IFRS”) by U.S. issuers beginning in the year 2014. Currently U.S. issuers use generally accepted accounting principles (GAAP). The proposed multi-year roadmap is expected to incorporate several milestones that, if achieved, could lead to the use of IFRS in the United States.
The SEC had previously posted a concept release on whether U.S. issuers registered with the SEC should have the option of preparing their financial statements in accordance with IFRS and hosted several roundtables on the topic within the past year. The announcement followed widespread support for a mandatory adoption by U.S. issuers of a global standard.

In addition, the vote comes on the heels of a unanimous vote by the SEC to update and modernize the disclosure requirements for foreign companies offering securities in U.S. markets.

The roadmap is expected to outline what requirements would be included in IFRS compliant financial statements filed with the SEC. In addition, the roadmap is expected to include the milestones and conditions necessary to achieve the SEC’s implementation of IFRS and that the SEC will make a determination regarding whether to implement the mandatory use of IFRS by 2011. If adopted, the requirement would be phased in from 2014 through 2016, with larger companies being required to implement IFRS first.

For more information, see the press release available at http://sec.gov/news/press/2008/2008-184.htm. The link also includes a video attachment to the relevant portion of the SEC Open Meeting. For more information on the SEC vote to modernize disclosure requirements, see http://sec.gov/news/press/2008/2008-183.htm.  

 
 

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.
 

U.S. Court of Appeals denies a petition for rehearing en banc of panel decision in Jones v. Harris Associates

August 22, 2008 1:14 PM  

The U.S. Court of Appeals for the Seventh Circuit denies a petition for rehearing en banc of its panel decision in Jones v. Harris Associates.
In May 2008, the Seventh Circuit determined that a mutual fund adviser had not breached its fiduciary duty to the fund under section 36(b) of the Investment Company Act by receiving an allegedly excessive fee. The original three-judge panel, in Jones v. Harris, held that courts should generally not second-guess fees payable to mutual fund managers when these fees had been fully disclosed and approved by the funds’ trustees. The court declined to apply the “reasonableness test” developed by the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, and emphasized instead that a fiduciary “must make full disclosure and play no tricks but is not subject to a cap on compensation.”

The Seventh Circuit denied a petition for rehearing en banc of the original panel decision in Jones v. Harris. Judge Posner, joined by Judges Rovner, Wood, Williams, and Tinder dissented, questioning the underlying economic incentive analysis on which the panel decision is based. Judge Posner observed that “[c]ompetition in product and capital markets can’t be counted on to solve the problem because the same structure of incentives operates on all large corporations and similar entities, including mutual funds.” In addition, Judge Posner’s dissent challenged Judge Easterbrook’s earlier conclusion that trustees and investors (voting with feet and dollars) ultimately ascertain the worth of advisory services. Citing, among other articles, WilmerHale’s May 27, 2008 Client Alert as evidence of representative industry sentiment, Posner also contended that a rehearing was warranted in part due to a general recognition of a circuit split as a result of the Jones opinion and the importance of the issue to the mutual fund industry.

The plaintiffs’ petition for rehearing and petition for rehearing en banc is described in more detail in a prior issue of the WilmerHale Investment Management Industry News Summary, dated July 11, 2008.

For more information, see the opinion, Jones v. Harris Associates L.P., No. 07-1624 (7th Cir. Aug. 8, 2008) (per curiam),and the panel decision, Jones v. Harris Associates L.P., 527 F.3d 627 (7th Cir. May 19, 2008). WilmerHale’s client alert on Jones v. Harris, cited in Posner’s dissent, is available at http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8329.
 

 
 

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 Announces Fair Fund Distribution to Harmed Investors

August 22, 2008 1:12 PM  

On August 18, 2008, the SEC announced the distribution of nearly $40 million to investors harmed by undisclosed market timing and excessive short-term trading in certain mutual funds. Notably, this is the first distribution of a series of Fair Fund distributions to certain mutual fund investors. The total distribution is anticipated to be over $150 million and relates to administrative proceedings brought by the SEC and the Massachusetts Securities Division in October 2003.
The Sarbanes-Oxley Act of 2002 authorized the SEC to include fines paid for securities law violations in Fair Fund distributions. Prior to the Act, only disgorgement proceeds could be distributed to investors.

For more information, see the press release available at http://sec.gov/news/press/2008/2008-178.htm.
 

 
 

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.
 

Goldman Sachs Trust No-Action Letter

August 22, 2008 1:10 PM  
On August 19, 2008, the SEC staff issued a no-action letter providing relief under section 10(f) of the Investment Company Act of 1940 (the “1940 Act”).
Section 10(f) prohibits a registered investment company from knowingly purchasing any security during an underwriting or selling syndicate if the fund has certain affiliations with a principal underwriter for the security. This provision is designed to prevent underwriters from “dumping” otherwise unmarketable securities on a fund in order to benefit the fund’s affiliated underwriter. Rule 10f-3 under the 1940 Act permits a registered investment company to engage in transactions otherwise prohibited by section 10(f), provided that the provisions meet certain conditions. These include a requirement that the issuer of securities have been in continuous operation for not less than three years, including the operations of any predecessors.

The funds applying for no-action relief sought permission to purchase in an underwritten offering certain fixed income securities (1) that have two or more co-issuers and (2) for which the payment of principal and interest is fully guaranteed by a guarantor (the “Guarantor”). These securities do not meet the conditions of rule 10f-3(c)(4) because some (but not all) of the co-issuers have been in continuous operation for less than three years.

The SEC staff determined that it would not recommend enforcement action to the SEC under section 10(f) of the 1940 Act, based on the representations made in the applicants’ letter, including the following:
  • The issuer that has been in operation for at least three years (“Co-Issuer A”) and the Guarantor will be responsible for 100% of the payment of principal and interest on the securities;
  • The credit of Co-Issuer A and the credit of the Guarantor will stand behind the securities; and
  • Each fund will have direct recourse against Co-Issuer A and against the Guarantor in the event that 100% of the payment of principal and interest on the securities has not been made.

For more information, see the no-action letter request at http://sec.gov/divisions/investment/noaction/2008/goldmansachstrust081508-incoming.pdf and the no-action letter issued by the SEC staff at http://sec.gov/divisions/investment/noaction/2008/goldmansachstrust081908.htm.

 
 

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.
 

IM Division Resumes Granting 19(b) Exemptive Applications

August 22, 2008 12:58 PM  
Following a four-year moratorium, the Division of Investment Management has resumed granting exemptions from section 19(b) of the Investment Company Act of 1940 (“1940 Act”). Section 19(b) generally prohibits an investment company from making long-term capital gains distributions more than once a year. Relief provided under 19(b) exemptive orders typically allow funds to make periodic distributions of long-term capital gains up to twelve times a year, which may be necessary for funds that have committed to a managed distribution policy.

Recently, closed-end investment companies registered under the 1940 Act have sought exemptive relief in order to implement regular and periodic distributions. In their applications, applicants have agreed to certain conditions, including:
  • Quarterly reports from the fund CCO reporting whether the fund and fund adviser have complied with the conditions of the exemptive order, and annual review of the adequacy of the policies and procedures adopted by the fund;
  • Additional disclosures to fund shareholders, including the source and amount of distribution in table or graph format, disclosure shareholders from drawing certain conclusions from the distribution and a further explanation of how the distribution includes a return of capital;
  • A requirement that funds make required disclosures with a press release and posting on the fund’s website;
  • Delivery of the rule 19a-1 notice to the fund shareholders themselves, rather than only to their financial intermediaries holding shares in a nominee name; and
  • Certain additional steps the board must take if fund common shares have traded at a premium to the fund’s net asset value per share.
    Subject to the applicants’ compliance with these conditions, the SEC has granted the applicants exemptions from section 19(b) and rule 19b-1 under section 6(c) of the 1940 Act.


For more information, see recent orders granting exemptions from section 19(b) of the 1940 Act and rule 19b-1, at http://sec.gov/rules/ic/2008/ic-28352.pdf and http://sec.gov/rules/ic/2008/ic-28357.pdf. Notices of Application, corresponding to the orders referenced above are available at http://sec.gov/rules/ic/2008/ic-28329.pdf and http://sec.gov/rules/ic/2008/ic-28332.pdf, respectively.

 
 

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.
 

343">SEC announces successor to EDGAR database, the Interactive Data Electronic Applications (“IDEA”)

August 22, 2008 12:56 PM  

On August 19, 2008, Chairman Christopher Cox announced the eventual replacement of the agency’s EDGAR database with a new system aimed at providing investors with the ability to better analyze corporate reports and other financial information. The Interactive Data Electronic Applications database, or “IDEA,” will supplement the current EDGAR database system and, eventually, replace the current system. The timetable to full maturity is five years out.

At current, over 500,000 SEC financial statement filings are available through EDGAR. The IDEA platform will run on interactive data, which “tags” and identifies individual items in a company’s financial disclosures. IDEA will allow investors to collate information from the forms and create reports from that data. The information can then be reorganized and downloaded in spreadsheet for integration in software or use in conjunction with search capacities.

IDEA is the latest of announcements relating to integration of electronic systems, including the filing of financial results using XBRL, and guidance on how companies can use corporate websites and blogs for the release of material information under regulation Fair Disclosure. The investor protection agency has indicated that some interactive filings will become available late this year.

The SEC’s unanimous vote to propose that mutual funds be required to provide risk and return summary information in an interactive data format is described in more detail in a prior issue of the WilmerHale Investment Management Industry News Summary, dated May 30, 2008.


For more information, see the SEC press release available at http://sec.gov/news/press/2008/2008-179.htm.

 
 

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 Announces Proposed Plan to Enhance Insider Trading Surveillance and Detection

August 15, 2008 1:22 PM  

On August 13, 2008, the SEC published for comment an agreement designed to improve detection of insider trading across the equities markets among the securities self-regulatory organizations (“SROs”) by centralizing surveillance, investigation, and enforcement under NYSE Regulation, Inc. and the Financial Industry Regulatory Authority, Inc. (“FINRA”).

As a complement to the regulatory allocation agreement, the securities exchanges and FINRA also entered into regulatory services agreements. FINRA, the American Stock Exchange LLC (“AMEX”), Boston Stock Exchange, Inc., CBOE Stock Exchange, LLC, Chicago Stock Exchange, Inc., International Securities Exchange, LLC, NASDAQ Stock Market, LLC, National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE Arca Inc., Philadelphia Stock Exchange, Inc., and NYSE Regulation, Inc., acting under authority delegated to it by NYSE, are parties to these agreements.

Section 19(g)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires, among other things, that every SRO registered as either a national securities exchange or national securities association examine, and enforce compliance by, its members and persons associated with its members with the Exchange Act’s, applicable rules and regulations, and the SRO’s rules. However, an SRO may be relieved of this responsibility in certain circumstances, including 17(d)(1) of the Exchange Act and Rules 17d-1 and 12d-2 thereunder, which permit SROs to propose joint plans for the allocation of regulatory responsibilities with a single SRO as the designated examining authority.

Currently, each exchange conducts its own regulatory insider trading program and relies upon cooperation with other exchanges when potential insider trading is detected. Among other things, the proliferation of electronic trading, however, has allowed more trading in NYSE-listed stocks outside the NYSE, resulting in gaps in the ability of the exchanges to monitor insider trading.

Under the proposed plan, each exchange gives regulatory responsibility for the detection of insider trading to FINRA for AMEX and Nasdaq-listed securities, and to NYSE Regulation Inc. for NYSE and NYSE Arca-listed securities, in each case regardless of where the actual trading occurs. The proposal permits any participating organization to cancel its participation upon 180 days written notice to other participating organizations and approval by the SEC.

In addition, an exchange committee composed of one representative from each organization would meet up to four times a year to discuss the conduct of regulatory responsibilities, identify issues or concerns, and receive and review reports.

For more information, see the Release available at: http://sec.gov/rules/other/2008/34-58350.pdf; and press release available at http://sec.gov/news/press/2008/2008-174.htm.  

 
 

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 Announces Auction Rate Securities Settlements

August 15, 2008 1:19 PM  
The SEC recently announced several preliminary settlements in principle with certain brokerage firms pertaining to auction rate securities. Each plan includes providing liquidity to certain purchasers of auction rate securities.

Auction rate securities are long-term variable rate securities with interest rates set at periodic and frequent dutch auctions. Typically auction rate securities are either long-term debt instruments issued by municipalities or other public sector institutions, or preferred equity instruments issued by closed-end mutual funds. In the last two decades, the auction rate securities market has grown to an estimated $330 billion.

As a result of a series of recent failures in the auction rate securities market, various state regulators and the SEC are investigating brokerage firms that underwrote auction-rate securities in connection with allegations regarding the illiquid nature of certain auction rate securities and the role of the underwriters in the marketing and auction process for such securities.

Under each preliminary settlement agreement, the settling brokerage firm will agree to:
  • After a specified date, repurchase auction rate securities from investors who purchased prior to the collapse of the auction rate securities (in some cases, first from retail customers and then from institutional customers, and in other cases from retail customers only and using best efforts with respect to institutional customers).
  • Provide no-cost loans to customers with outstanding auction-rate securities until the notes are repurchased.
  • Participate in a special arbitration process for customers who have incurred consequential damages beyond the loss of liquidity (at the election of such customer) whereby the brokerage firm will not contest liability for misrepresentations and omissions concerning the auction rate securities but may challenge the existence or amount of consequential damages.
  • Not liquidate its own inventory of any particular auction rate security until it first liquidates its customers’ positions in the same security.

The settlements provide that each settling firm will be enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act and Rule 15(c)(1)-(2), which prohibits the use of manipulative or deceptive devices by broker-dealers.
In addition to the settlements in principle, several brokerages have offered voluntary buybacks to investors such as retail clients, individuals, charities, and small and mid-sized businesses.

Following the SEC settlements, at least one state regulator’s office announced publicly that it wants to begin immediately settlement talks with other securities firms; as a result, it is likely that a number of additional firms are close to nearing settlements, which likely will follow the same template.

For more information, see http://sec.gov/news/press/2008/2008-168.htm, http://sec.gov/news/press/2008/2008-171.htm, and http://www.reuters.com/article/marketsNews/idINN1249812120080812?rpc=44

 
 

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 Announces New Tools to Aid Mutual Funds with Anti-Money Laundering (“AML”) Efforts

August 8, 2008 1:38 PM  

On August 7, 2008, the SEC announced two new tools to facilitate mutual funds’ anti-money laundering efforts. The first is a one-stop online reference site, which contains links to laws, rules and SEC guidance regarding AML compliance obligations. The second new tool is a centralized phone line, called the SEC SAR Alert Message Line (202-551-SARS (7227)). Securities firms should only use this number when they have filed a Suspicious Activity Report (“SAR”) that may require the immediate attention of the SEC. It is important to note that placing a call to SEC SAR Alert Message Line does not fulfill a mutual fund or broker-dealer’s obligation under the SAR rules to immediately notify an appropriate law enforcement authority when AML violations require immediate attention. In those circumstances, the mutual fund or broker-dealer must place an additional call to a law enforcement agency, such as the local IRS Criminal Investigation Division or FBI office.
 

 
 

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 Receives Final Report from the Advisory Committee on Improvements to Financial Reporting

August 8, 2008 1:35 PM  

On August 1, 2008, the SEC received the final report of its Advisory Committee on Improvements to Financial Reporting. The Committee was originally established in July 2007 with a mandate to examine the U.S. financial reporting system and recommend improvements to the SEC. According to the Chairman of the Advisory Committee, Robert Pozen, the goal of the report is to help the SEC “make financial reports more useful to investors – with clearer guidelines, fewer exceptions and greater focus on really important information.”

The scope of the report is limited to matters involving SEC registrants. It provides practical proposals to improve financial reporting in five main areas: increasing the usefulness of information in SEC filings; enhancing the accounting standards-setting process; improving the substantive design of new standards; delineating authoritative interpretive guidance; and clarifying guidance on financial restatements and accounting judgments.

One of the primary objectives is to make financial information more useful to investors while minimizing the burden on preparers. The Committee recommends that investors be able to play a larger role in setting accounting standards by increasing investor representation on the Financial Accounting Standards Board (“FASB”) and Financial Accounting Foundation. The Committee notes that the underlying objectives of certain accounting standards can be obscured by dense language, detailed rules and numerous exemptions. As a result, the Committee recommends that companies provide better disclosure to investors on their earnings, historical cost activity and unrealized gains and losses. The Committee also supports codification of all U.S. GAAP in one document and integration of SEC accounting guidance into this codification. The final recommendation is to increase correction of accounting errors and enhance disclosure about corrections to investors.

For additional information, please see the Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission, available at: http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.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.
 

SEC Issues First Section 19(b) Exemptions in Four Years

August 8, 2008 1:32 PM  
On August 5, 2008, the SEC issued an exemption from Section 19(b) and Rule 19b-1 under the Investment Company Act of 1940. Section 19(b) prohibits closed-end funds from making distributions of capital gains more than once a year. The exemptive order allows the funds to make managed distributions of long-term capital gains multiple times each year under certain circumstances and subject to certain conditions. The SEC had not granted such 19(b) exemptive orders in the past four years. However, it has issued sanctions for failure to comply with the Section 19(b) requirements. These enforcement actions are described in more detail in a prior issue of the WilmerHale Investment Management Industry News Summary, dated October 19, 2007.

The recent exemptive order permits two closed-end funds to make distributions of capital gains as frequently as twelve times per year and as frequently as the terms of any outstanding preferred stock would allow. This exemption contains conditions and representations designed to ensure that there is sufficient board oversight, and that each fund’s shareholders are provided sufficient information to understand that the periodic distributions are not tied to the fund’s net investment income. For example, each fund represents that its board has taken the following actions:
  • approved the managed distribution plan;
  • determined that the plan is consistent with the fund’s investment objectives; and
  • approved compliance policies to ensure that the required disclosures will be made to shareholders, prospective shareholders and third parties in conjunction with any distribution.
     

As a condition to the exemptive order, the fund’s Section 19(a) notice must include a table or graph that identifies the fund’s:

  • net investment income;
  • net realized short-term capital gains;
  • net realized long-term capital gains;
  • return of capital; and
  • fiscal year-to-date cumulative amount of distributions, cumulative total return, five-year average annual total return, and annualized current distribution rate.
     

This information must also be posted on the fund’s or adviser’s website, distributed by press release at the time of any managed distribution, and be included in any communication to shareholders, prospective shareholders and third parties regarding the distribution. The inside of the front cover of the shareholder report must also include a narrative description of the managed distribution plan. If any shares are held in nominee name by financial intermediaries, the fund must request and pay for these intermediaries to forward the Section 19(a) notices to the individual beneficial owners.

Finally, the fund’s chief compliance officer must provide a quarterly report to the fund board indicating whether the adviser has complied with the conditions of this order and whether any violations have occurred. In addition, the chief compliance officer must provide the fund board with the results of an annual evaluation of the adequacy of the compliance policies and procedures addressing these distributions.

The above conditions and representations are expected to be applied to future applicants for Section 19(b) exemptive orders.

For more information, see the Notice and Order available at: http://www.sec.gov/rules/ic/2008/ic-28329.pdf; and http://www.sec.gov/rules/ic/2008/ic-28352.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.
 

SEC Reopens Comments on Proposed Rule to Streamline Mutual Fund Disclosures

August 8, 2008 1:24 PM  

On July 31, 2008, the SEC reopened the comment period on its proposed rule to streamline mutual fund disclosures. The proposed rule, originally released on November 15, 2007, is designed to encourage mutual funds to bring information to investors in a user-friendly format through the use of a mandatory summary section in each prospectus and an optional short form prospectus that could be used when the statutory prospectus, annual report, and shareholder report are made available on the Internet in a user-friendly format.

The proposed rule would require every mutual fund prospectus to include specific key information, including investment objectives and strategies, risks and costs, in plain English in a standardized order at the front of the statutory prospectus. The rule would also authorize a mutual fund to satisfy its prospectus delivery obligation under Section 5(b)(2) of the Securities Act of 1933 by (1) delivering a “summary prospectus” to prospective and existing investors, and (2) providing the summary prospectus, statutory prospectus, shareholder reports and other information on the Internet in a format that enables investors to effectively navigate the more detailed information in those documents.

The proposed rule is described in more detail in a prior issue of the WilmerHale Investment Management Industry News Summary, dated November 29, 2007.

Since releasing the proposed rule in November 2007, the SEC has conducted investor research through focus groups and a telephone survey. The focus groups examined investors’ reactions to the proposed summary sections and short form formats and sought to identify the categories of information that are most important to investment decisions. The telephone survey investigated whether current prospectuses are written in plain English and what sections investors currently read. In addition, the survey explored what key information investors would like but do not currently receive in the prospectus. The SEC has posted the results of these focus groups and the survey on its website and reopened the comment period to enable the public to respond to this information. Comments on the proposed rule may now be submitted through August 29, 2008.

For more information, see the proposed rule reopening the comment period and the original proposed rule, available at: http://www.sec.gov/rules/proposed/2008/33-8949.pdf; and http://www.sec.gov/rules/proposed/2007/33-8861.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.
 

Independent Directors Council (“IDC”) Task Force Reports on Board Oversight of Derivatives

August 1, 2008 3:46 PM  

An IDC Task Force has issued a report providing guidance for fund directors regarding oversight of derivatives. The report discusses (i) board oversight responsibilities; (ii) definitions and primary categories of derivatives; (iii) portfolio management applications, risks, and controls; (iv) operational and regulatory considerations; and (v) board practices and resources. The report’s discussion of operational and regulatory considerations covers, among other things, (a) custody, collateral and segregation; (b) valuation; (c) accounting, financial reporting and tax; and (d) disclosure. In connection with board practices and resources, the report notes that practices are evolving, and addresses the importance of board education and of reports from the adviser to assist the board in its oversight responsibilities.

For more information, please see the IDC Task Force Report, available at http://www.idc1.org/getPublicPDF.do?file=22729.

 
 

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.
 

DOL Proposes Regulations Regarding New Disclosure Requirements for Participant-Directed Individual Account Plans

August 1, 2008 3:45 PM  

On July 23, 2008, DOL issued proposed regulations that would require fiduciaries of participant-directed individual account plans subject to ERISA, such as 401(k) plans, to make regular and periodic disclosures to participants and beneficiaries. The required disclosures are designed to provide participants and beneficiaries certain plan and investment-related information, including fee and expense information and past performance data, to assist them in making informed decisions about the management of their individual accounts and the investment of their retirement savings. DOL has proposed that the new regulations be made effective for plan years beginning on or after January 1, 2009 and is accepting written comments from the public until September 8, 2008.

Under the proposed rules, plan fiduciaries must disclose the following information to participants and beneficiaries upon becoming eligible for a plan and annually thereafter: a description of investment options, voting rights, investment alternatives, fees and expenses for administrative and individual services, and a chart displaying the average annual total return and fees and expenses of each of the plan’s investment alternatives for 1, 5 and 10-year periods, along with comparable data on appropriate broad-based benchmarks. On a quarterly basis, fiduciaries must also disclose the actual dollar amount charged to an individual’s account during the preceding quarter for administrative and individual services and provide a description of those services.

Some of the new proposed requirements may be satisfied by incorporating the information in the plan’s summary plan description or pension benefit statement. A model of the chart, which must include specific disclosure statements and identifying information, is provided in an appendix to the proposed regulations. DOL has also proposed a corresponding amendment to the regulations for Section 404(c) of ERISA. Section 404(c) provides plan fiduciaries with liability protections on participant-directed individual account plans if the plan explicitly satisfies the requirements in the 404(c) regulations, including a requirement to provide certain information to plan participants. The amendment integrates and cross-references the new disclosure requirements in order to avoid having different rules for plans intending to be Section 404(c)-compliant.

For more information, please see the proposed regulations, which may be found at: http://www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=20973&AgencyId=8&DocumentType=1.
 

 
 

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.
 

Two New SEC Commissioners Sworn In

August 1, 2008 3:41 PM  

On July 31 and August 1, 2008, respectively, Luis A. Aguilar and Troy Paredes were officially sworn in as SEC Commissioners. Prior to becoming Commissioners, Mr. Aguilar had been a partner in the Atlanta, GA office of McKenna Long & Aldridge LLP, and Mr. Paredes had been a professor at Washington University School of Law in St. Louis, MO.

For more information, please see the SEC News Releases, available at: http://www.sec.gov/news/press/2008/2008-161.htm and http://www.sec.gov/news/press/2008/2008-167.htm.
 

 
 

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 Formalizes Cooperative Efforts with the Department of Labor ("DOL") to Protect Retirement Savings and Investments  

August 1, 2008 3:40 PM  

On July 29, 2008, the SEC Chairman and the U.S. Secretary of Labor executed a Memorandum of Understanding which formalizes cooperative efforts to protect retirement savings and investments. The SEC agreed to provide DOL with access to non-public information regarding regulated entities the SEC secures through enforcement actions and regulatory examinations where the SEC staff determines that the information is of mutual interest to the SEC and DOL. Access to the information will be subject to certain confidentiality assurances. The SEC and DOL will also designate specific points of contact for their cooperative efforts, meet regularly to ensure proper coordination procedures are in place and are effective and explore cross-training opportunities.

For more information, please see the Memorandum of Understanding, available at: http://www.sec.gov/news/press/2008/mou072908.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.
 

SEC Extends Emergency Order Regarding Naked Short Selling

August 1, 2008 3:38 PM  

On July 29, 2008, the SEC extended its emergency order regarding naked short selling. The emergency order was designed to prevent naked short selling in the securities of Fannie Mae, Freddie Mac and 17 other financial services companies. Citing its concerns regarding “the ongoing threat of market disruption and effects on investor confidence,” the SEC extended its emergency order until August 12, 2008. The restrictions on short selling continue to apply to Fannie Mae, Freddie Mac and the 17 other previously identified financial services companies. The SEC also indicated that the order will not be further extended. Rather, the SEC announced that “following expiration of the [order, it] will proceed immediately to consideration of rulemaking, which would become effective after notice and comment.

The emergency order is described in more detail in prior issues of the WilmerHale Investment Management Industry News Summary, dated July 18, 2008 and July 25, 2008.

The order extending the emergency order is available at: http://www.sec.gov/rules/other/2008/34-58248.pdf. The emergency order and related FAQs may be found at http://www.sec.gov/rules/other/2008/34-58166.pdf; http://sec.gov/rules/other/2008/34-58190.pdf; andhttp://sec.gov/divisions/marketreg/emordershortsalesfaq.htm.

 
 

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 Provides New Guidance for Investment Company Board Oversight Responsibilities, including the Use of Soft Dollars  

August 1, 2008 3:35 PM  

On July 30, 2008, the SEC issued proposed guidance to boards of directors of registered investment companies to assist the boards in fulfilling their oversight responsibilities with respect to investment advisers’ trading of fund portfolio securities. Significantly, the proposed guidance does not impose any new requirements on fund directors or investment advisers. It seeks to provide a framework for directors to work within when conducting their oversight of an adviser’s trading activities. The proposed guidance follows the interpretive guidance issued by the SEC in 2006, which, among other things, clarified the scope of the safe harbor provided to investment advisers that use soft dollars to purchase brokerage and research services under Section 28(e) of the Securities Exchange Act of 1934.

While the 2006 guidance focused on investment advisers, the proposed guidance focuses on board oversight of investment advisers’ obligation to seek best execution when the adviser trades fund securities. The guidance sets out the board’s legal responsibilities to oversee the operations of the fund, including the board’s fiduciary duties to, among other things, monitor the conflicts of interest that arise with respect to an adviser’s trading practices, specifically those associated with an adviser’s use of soft dollars.

The proposed guidance also suggests certain information that a fund board should request from an investment adviser to enable the directors to determine that conflicts of interest are being managed and fund assets are being used in the best interests of the fund. This information includes: (i) the identification of broker-dealers to which the adviser has allocated fund trading and brokerage; (ii) the commission rates or spreads paid; (iii) the total brokerage commissions and value of securities executed that are allocated to each broker-dealer during a particular period; and (iv) the fund’s portfolio turnover rates.

The proposed guidance notes that a board’s annual review of the fund’s investment advisory contract under Section 15(c) of the Investment Company Act of 1940 should incorporate consideration of any soft dollar benefits that the adviser receives from fund brokerage. To assist fund boards in carrying out their responsibilities under Section 15(c), the proposed guidance further indicates that boards should request from the adviser information regarding the adviser’s brokerage policies and how the fund’s brokerage commissions were allocated.

Comments regarding the proposed guidance are due by October 1, 2008.

For more information, please see the proposed guidance, available at: http://www.sec.gov/rules/proposed/2008/34-58264.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.
 

Deadline Approaches for Boards of Certain Investment Companies to Approve Identity Theft Prevention Programs under the Federal Trade Commission ("FTC") Red Flag Rule

August 1, 2008 8:39 AM  

Pursuant to the Fair and Accurate Credit Transactions Act of 2003, the FTC has enacted a rule for protection of consumers, known as the FTC Red Flag Rule. This Rule requires certain financial institutions to develop, approve and implement identity theft prevention programs (“Programs”). The Rule applies to financial institutions that offer or maintain “covered accounts,” as defined by the Rule, for consumers. This can, for example, include investment companies that offer check-writing privileges. Investment companies that are subject to the Rule must not only establish a Program by November 1, 2008; they must also obtain board approval of the Program by that date.

At a minimum, if an investment company is subject to the rule, its Program must provide policies and procedures that address each of the following elements: (i) identification of red flags indicating identity theft; (ii) detection of red flags in appropriate accounts; (iii) an appropriate response when a red flag is detected; and (iv) periodic updates to ensure the identification and detection procedures are appropriate for its business and responds to industry experiences. The Rule also provides specific guidelines regarding the risks and issues that should be considered for each element of the Program.

The FTC’s Rule 681.2 can be found on pp. 63772-63774.

 
 

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.