Investment Management Industry News Summary - December 2007

Investment Management Industry News Summary - December 2007

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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FINRA Fines Member Firm for Deceptive Trading Practices

December 14, 2007 9:24 AM

On November 29, 2007, FINRA announced that it had sanctioned a member firm for facilitating improper trading practices and for failing to maintain an adequate supervisory system to detect and prevent deceptive market timing and late trading. FINRA found that, from January 2001 through August 2003, the firm assisted six hedge fund customers in circumventing market timing restrictions and escaping detection through the use of multiple related customer accounts, as well as by using different broker branch codes. Over much of this period, the firm also enabled two hedge fund clients to circumvent attempts by mutual fund companies to prevent such trading. FINRA found that the firm lacked systems or procedures to address these issues and failed to respond to warnings that its brokers were engaged in improper trading practices. FINRA ordered the firm to refrain from opening new mutual fund brokerage accounts for 90 days, fined the firm $350,000, and ordered restitution of $59,605 to two mutual fund families from profits derived from market timing.

The FINRA release can be found at http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P037536.

 
 
 

 
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.

FINRA Issues Guidance on Review and Supervision of Electronic Communications

December 14, 2007 9:04 AM

On December 7, 2007, the Financial Industry Regulatory Authority (“FINRA”) published final guidance regarding the review and supervision of electronic communications by member firms. The guidance follows the joint publication of proposed guidelines by the National Association of Securities Dealers (“NASD”) and New York Stock Exchange (“NYSE”) Member Regulation in June 2007 prior to the consolidation of NASD and the member regulation, enforcement, and arbitration functions of NYSE in July 2007. The final guidelines seek to assist member firms in establishing supervisory systems and procedures for electronic communications that are reasonably designed to achieve compliance with applicable federal securities and self-regulatory organization rules.

At one time, NASD and NYSE Member Regulation required that members review all correspondence of their registered representatives relating to the solicitation or execution of any securities transactions. Since 1998, member firms have been allowed flexibility in designing supervisory review procedures that are appropriate to an individual firm’s business model. Some firms employ risk-based principles to determine appropriate review methodologies, provided that such models include supervisor review. For example, both NASD and NYSE rules require that a member’s legal and compliance department be copied on communications between non-research and research departments concerning the content of a research report. Similarly, both rule regimes require the identification and reporting of customer complaints and the identification and prior approval of every order error and other account designation change.

In designing a risk-based procedures, FINRA now asks that member firms to consider how best to address the following issues:

  • flag electronic communications that may evidence customer complaints, problems, errors, order or other instructions for an account; or evidence conduct inconsistent with FINRA rules, the federal securities laws, or other matters of importance to the member firm (such as supervisory, reputational, financial, or litigation risks);
  • identify other business areas that may warrant supervisory review; and
  • educate employees to understand and comply with the firm’s policies and procedures concerning electronic communications.
  • In adopting such procedures, FINRA has reminded members to look to guidance set forth in existing interpretive materials, which it summarized as follows:
  • identify correspondence that will be post- or pre-reviewed;
  • identify the positions responsible for conducting such reviews;
  • monitor implementation of and compliance with review procedures;
  • periodically reevaluate the effectiveness of the review procedures;
  • report all customer complaints in compliance with FINRA reporting requirements;
  • prohibit employees from using electronic communications unless such communications are subject to supervisory and review procedures; and
  • conduct necessary training and education.
  • FINRA also provided new interpretive guidance in six general areas.
  • Member firms should develop clearly defined written policies and procedures that are easily accessible and regularly updated through a member firm’s intranet site. Such procedures should lay out consequences for non-compliance, plainly state what kinds of electronic communication activities are and are not permissible, and be the subject of regular training.
  • Both external and internal communications must be the subject of reasonable policies and procedures, based on risk-based design principles that take into account employee use of such media as non-member e-mail platforms (such as AOL or Yahoo mail), message boards, and e-faxes.
  • Review procedures for internal and external communications should clearly identify the person(s) responsible for review and such supervision should be evidenced in accordance with FINRA rules (e.g., NASD Rules 3010(d)(1), 2210, and 2211 and NYSE Rules 342(b)(2) and 472). Where duties are delegated, reviewers must be sufficiently knowledgeable and experienced, and escalation procedures must be clearly delineated.
  • Any review methodology must be reasonably designed to achieve compliance with applicable securities laws, regulations, and FINRA rules. Such reviews should take adequate account of the monitoring of encrypted messages and messages in foreign languages.
  • The frequency of review should depend on the type of business or business activity at issue, but should adhere to prescribed timeframes set forth in the review policies and procedures.
  • Member firms must create and maintain electronic or paper records to evidence their reviews in order to demonstrate that they have been conducted. Such evidence of review should, at a minimum, clearly identify the reviewer, the communication that was reviewed, the date of the review, and the steps taken as a result of any significant regulatory issues that were identified during the course of the review: “[m]embers should remind their reviewers that merely opening the communication will not be deemed a sufficient review.”
  • Regulatory Notice 07-59 can be found at http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/
    p037553.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 Adopts Proxy Rule Amendments to Encourage Shareholder Forums

December 14, 2007 9:02 AM

On November 28, 2007, the SEC voted to adopt amendments to the proxy rules under Section 14 of the Exchange Act to encourage the use of electronic shareholder forums. The amendments are intended to clarify that participation in a shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, will be exempt from most of the proxy rules if the following conditions are met:

  • Any participant may rely on the new exemption so long as the communications occur more than 60 days prior to the date of the annual or special meeting, and the communicating party does not solicit proxy authority while relying on the exemption.
  • A participant in a forum will be eligible to solicit proxy authority after the date that the exemption is no longer available, provided that the solicitation is conducted in accordance with Regulation 14A.
  • Where a company announced a meeting of shareholders less than 60 days prior to the meeting date, the solicitation could not occur more than two days following the company’s announcement.
  • The amendments further provide that a shareholder, company, or third party acting on behalf of either, that establishes, maintains, or operates an electronic shareholder forum will not be liable under the federal securities law for any statement or information provided by another forum participant.

The rule amendments will take effect 30 days after publication in the Federal Register.

A summary of the Commission’s action appears at http://www.sec.gov/news/press/2007/2007-247.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 Codifies Policy on Shareholder Proposals on Election Procedures

December 14, 2007 9:00 AM

On November 28, 2007, the SEC voted to adopt an amendment to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934 (“Exchange Act”) to codify the Commission’s longstanding interpretation of that rule. Rule 14a-8 under the Exchange Act provides an opportunity for a shareholder owning a relatively small amount of a company’s securities to submit a proposal for inclusion in a company’s proxy materials, provided that the shareholder complies with certain procedural requirements and the proposal does not fall within one of thirteen substantive bases for exclusion. One of these bases, Rule 14a-8(i)(8), permits a company to omit any proposal that “relates to an election for membership on the company’s board of directors or analogous governing body.” The Commission voted to amend the language of the rule to read as follows: “If the proposal relates to a nomination or an election for membership of the company’s board of directors or analogous governing body or a procedure for such nomination or election.”

This action was taken to provide certainty to shareholders and companies following American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., 462 F.3d 121 (2d. Cir. 2006), a Second Circuit decision which did not defer to the Commission’s interpretation of the rule but held that a public company could not rely on Rule 14a-8(i)(8) to exclude a shareholder proposal seeking to amend the company’s bylaws to establish a procedure under which the company would be required, in specified circumstances, to include shareholder nominees for director in the company’s proxy materials.

The rule’s effective date is January 8, 2008.

The Adopting Release can be found at http://www.sec.gov/rules/final/2007/34-56914.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.

Donohue Describes Accomplishments and Challenges in 2007 and Plans for 2008

December 14, 2007 8:58 AM

In his December 6, 2007 remarks before the ICI 2007 Securities Law Developments Conference, SEC Division of Investment Management Director Andrew J. Donohue summarized the Division’s priorities in 2007, key events that affected the Division’s work in 2007, and certain priorities he expects the Division to address in 2008.

Mr. Donohue reviewed the Division’s 2007 efforts to undertake mutual fund disclosure reform and to improve the process for reviewing exemptive applications. He noted that the Commission had recently issued its mutual fund disclosure amendments, the core of which is a concise, plain English summary of key information about investment objectives and strategies, costs, and risk, with more detailed information available to investors and potential investors in paper or in an online format. He described the proposal as a “win-win” for fund investors in that the disclosures are designed to be user friendly and more readily permit investors to compare key pieces of information between funds. He also expressed hopes that the new disclosures will prove to be less expensive to maintain and send to investors and thus will help keep down fund costs. Mr. Donohue underscored his hopes for input on the proposal from the fund community by the close of the comment period, February 28, 2008.

Mr. Donohue pointed to strides made by his staff in increasing the number of substantive orders issued through the exemptive application review process, noting that 81 substantive notices (an 84% increase) had been ordered by the end of the September 30 fiscal year. He stated that the median time that applications have been pending dropped from 16 months to 8 months, and the number of pending applications was reduced by more than 25%, over the same period. He announced plans to ensure that applicants receive initial comments within 120 days of receipt of an application and to establish formal procedures to keep applicants informed of the progress of their requests by designating a staff attorney to make (1) initial contact with applicants within days of an application’s receipt and (2) “status calls” on an application’s progress once every 60 days.

Mr. Donohue summarized other significant developments during 2007, including the Division’s efforts to address unexpected events that resulted from turmoil in the credit markets. He reviewed his own efforts to make one-on-one visits to fund boards throughout the year. Looking ahead, Mr. Donohue described two key priorities for 2008. In addition to identifying several significant concerns related to current rule 12b-1 fees and fund distribution practices, he described plans to reexamine and modernize the books and records requirements that apply to funds and fund advisers.

A copy of Mr. Donohue’s speech can be found at http://www.sec.gov/news/speech/2007/spch120607ajd.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.

OCIE Chief Counsel Describes Changes to NYRO Pilot Letter

December 14, 2007 8:55 AM

At the 2007 session of the Securities Law Developments Conference sponsored by the Investment Company Institute (“ICI”) in Washington, D.C., John Walsh, Chief Counsel in the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), stated that there would be extensive changes to the examination request approach of a pilot letter first sent by the SEC’s New York Regional Office (“NYRO”) to various New York-area investment advisers in August 2007. The original letter was greeted by many in the industry as overly invasive and time-consuming. Mr. Walsh indicated that future letters will eliminate certain questions that were viewed as particularly controversial (for instance, firms were asked to create or share with OCIE staff certain materials that are not required records under the federal securities laws). Mr. Walsh announced that subsequent letters will be shorter and will permit examinees to provide oral as well as written responses where appropriate. He also stated that the letters will adopt a two-step approach to document requests whereby the staff will ask follow-up questions only if an examination question raises areas of particular concern.

 
 
 

 
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 Releases Sample Format for Proposed Fund Summary Prospectus

December 14, 2007 8:53 AM

On November 29, 2007, the SEC published a sample prototype of its summary prospectus for open-end investment companies. The sample format follows the SEC’s November 21, 2007 proposed amendments to the forms and rules used by open-end investment companies to register under the 1940 Act and to offer securities under the Securities Act of 1933 (“Securities Act”). See IM News Summary, December 10, 2007.

A copy of the sample format can be found at http://www.sec.gov/investor/enhanceddisclosure.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 Issues No-Action Assurances for Certain In-Kind Purchase Transactions

December 14, 2007 8:51 AM

On November 16, 2007, the staff of the SEC’s Division of Investment Management (the “Division”) issued a no-action letter giving assurance to a mutual fund that the staff would not recommend enforcement action under Section 17(a) of the Investment Company Act of 1940 (“1940 Act”) if certain portfolios of the fund sold their portfolio securities and other assets to other portfolios of the fund or to portfolios of an affiliated fund in exchange for shares of those portfolios.

Seven portfolios of the fund are asset allocation portfolios (“Asset Allocation Portfolios”), each of which allocates assets to various “sleeves” that are managed by one of 12 affiliated subadvisers. The fund proposed to restructure the management of the “Asset Allocation Portfolios” into a fund-of-funds structure so that each portfolio would invest directly in other portfolios of the company or those of an affiliated fund (“Target Portfolios”) that have substantially similar mandates to the sleeves currently used by the Asset Allocation Portfolios under the fund’s manager-of-managers structure. The no-action request stated that the proposed fund-of-funds structure would benefit shareholders by allowing the Asset Allocation Portfolios to save proxy solicitation costs associated with selecting new subadvisers or investment sleeves, add investment options in a timely way, and increase asset diversification.

The request proposed to effect the restructuring by having each Asset Allocation Portfolio deliver assets, excluding cash, of a particular sleeve in kind to acquire shares of the corresponding Target Portfolios. The request claimed that such in-kind purchases would benefit the Asset Allocation Portfolios by allowing them to avoid transaction costs and tax consequences that would be incurred if they had to sell in kind to purchase shares of the Target Portfolios.

In proposing the in-kind purchases, the request proposed that the fund and its affiliates adhere to a set of representations similar to those described in a prior no-action request, Gartmore Variable Insurance Trust (pub. avail. Dec. 29, 2006) (the “Gartmore Letter”). Among the representations, the request states that in-kind purchases would take place only in circumstances where:

  • An in-kind purchase would not dilute the interests of shareholders in either the Asset Allocation Portfolios or Target Portfolios (together, the “Participating Funds”).
  • The in-kind consideration accepted by a Target Portfolio would consist of assets that are appropriate, in type and amount, for investment by the Target Portfolio in light of its investment objectives and policies and current holdings.
  • An Asset Allocation Portfolio and corresponding Target Portfolio have the same policies and procedures for determining net asset values and would follow those policies in determining the amount of Target Portfolio shares to sell to an Asset Allocation Portfolio.
  • In-kind purchases would be effected pursuant to procedures adopted by the boards of the Participating Funds, including a majority of board members who are not interested persons as defined in section 2(a)(19) of the 1940 Act.
  • The boards would determine that all of the in-kind purchases were effected in accordance with these procedures, did not favor one set of funds over another, and were in the best interests of each Participating Fund. The boards would make this determination in a timely manner and keep records of that determination for an established period.
  • The fund’s adviser would disclose to the boards all material facts relating to any conflicts of interest between the manager and the Participating Funds with regard to the in-kind purchases
  • The Division’s letter notes that the assurance provided in this context is similar to that in the Gartmore Letter, but differs in that the consideration involved in the in-kind purchase transactions in the Gartmore Letter came entirely from simultaneous in-kind redemption transactions.

A copy of the no-action letter can be found at http://www.sec.gov/divisions/investment/noaction/2007/oldmutual111607-17a.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.

MSRB To Consider Tightening Pay-to-Play Rule

December 7, 2007 10:09 AM

In a November 5, 2007 press release, the Municipal Securities Rulemaking Board (“MSRB”) stated that it will consider whether an amendment to Rule G-37 – including an amendment to the definition of the term “official of an issuer” – may be appropriate in response to language in an opinion of the SEC issued on the same day affirming sanctions levied in a National Association of Securities Dealers (“NASD” now known as “FINRA”) matter against a member firm and its president.

The SEC opinion detailed how the NASD found that the firm and its president had violated Rule G-37, the so-called “pay-to-play” rule, by engaging in municipal securities business with a state’s political subdivisions within two years of contributions to members of the state’s bond commission. NASD concluded that the state bond commission officials in question came within the definition of “official of the issuer” because they “‘possessed the requisite authority to influence the outcome of the hiring of a dealer or financial advisor for municipal securities business by a political subdivision issuer.’” The SEC rejected this reasoning, stating that “NASD’s conclusion that Bond Commission officials were issuer officials with respect to political subdivision issuers effectively read out of the definition the requirement that the elected official have the power to appoint a person with the responsibility for or influence over the awarding of municipal securities business.”

Although the SEC set aside certain of NASD’s findings of violations of Rule G-37, it upheld the sanctions the self-regulatory organization imposed. Further, the SEC encouraged the MSRB to consider whether it may be appropriate to amend the rules at issue to address the kind of situation presented by the case. SEC Chairman Christopher Cox and Commissioners Annette Nazareth and Kathleen Casey participated in the matter. Commissioner Paul Atkins did not participate.

The SEC opinion appears at: http://www.sec.gov/litigation/opinions/2007/34-56741.pdf.

The MSRB release appears at: http://www.msrb.org/msrb1/Press/Release/SisungMSRBStatement.asp.

 
 
 

 
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.

MSRB Publishes Rule Clarification

December 7, 2007 9:47 AM

On November 8, 2007, the MSRB filed with the SEC proposed amendments to Rule G-27 designed to clarify that the requirements of the rule apply solely to the municipal securities activities of brokers, dealers and municipal securities dealers and their associated persons.

Rule G-27 was previously amended, with an effective date of February 29, 2008, to strengthen the supervisory procedures and controls of municipal securities dealers. In the new filing, the MSRB stated that, as a general principle, the requirements of Rule G-27 apply only to those registered persons who engage in municipal securities activities and those offices in which municipal securities activities are undertaken. The proposed rule change will explicitly incorporate this limitation on the applicability of Rule G-27 throughout the language of the rule, in addition to correcting certain cross-references and making certain formatting changes to improve clarity.

The MSRB has filed the proposal as a “non-controversial” rule change pursuant to Section 19(b)(3)(A)(iii) of the Exchange Act, and Rule 19b-4(f)(6) thereunder, which renders the proposal effective upon filing with the Commission.

The text of the proposed rule change is available at:
http://www.sec.gov/rules/sro/msrb/2007/34-56796.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.

FINRA Expels Firm After Finding AML Violations

December 7, 2007 9:42 AM

In settling charges brought by FINRA, a broker-dealer has agreed to be expelled from the industry and two of the firm’s principals have agreed to be fined and suspended for repeatedly violating anti-money laundering (“AML”) rules by, among other things, failing to investigate and report numerous suspicious transactions; failing to obtain adequate background information on new customer accounts; failing to conduct an independent test of its AML program; and failing to provide AML training. The principals were also found to have violated FINRA supervisory, recordkeeping and registration provisions.

FINRA found that, from February 2004 through September 2006, clientele of the firm included stock promoters and others who had been barred by FINRA or disciplined by the SEC or who had criminal histories. FINRA further found that in at least a dozen instances, customers of the firm sold large blocks of penny stocks that were linked to allegedly fraudulent schemes. FINRA also found that certain larger securities transactions effected through the firm displayed suspicious signs, including journaling of securities into accounts followed by immediate liquidation, as well as significant wire activities to known tax havens. In some instances, customers deposited into their accounts securities and/or funds that significantly exceeded their known income or resources.

NASD Conduct Rule 3011(a) requires FINRA member firms to establish and implement policies and procedures “that can be reasonably expected to detect and cause the reporting of” suspicious activities and transactions. According to FINRA, the firm had adopted written procedures requiring the firm to investigate potentially suspicious activity. Such investigations were to be conducted by the company’s AML compliance officers and result in the filing of suspicious activity reports. FINRA alleged that the firm’s AML officers did not comply with this requirement.

One of the principals of the firm agreed to be suspended as a principal for two years and for 90 days in all capacities, and to be fined $35,000. The other agreed to be suspended for six months in a principal capacity, 30 days in all capacities, and to be fined $25,000. Both individuals also agreed to obtain substantial AML training in the next two years.

The Letter of Acceptance Waiver and Consent in the matter can be viewed at: http://www.finra.org/web/groups/enforcement/documents/enforcement/p037393.pdf.

The FINRA press release in the matter can be viewed at: http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P037394.

 
 
 

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

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

No-Action Assurances for Money Market Funds with SIV Investments

December 7, 2007 9:33 AM

The Division has issued three recent no-action letters giving assurance to several money market funds, their affiliated investment advisers and parent entities that the staff would not recommend enforcement action if the entities entered into agreements designed to help the funds avoid potential losses on debt instruments that might otherwise cause the funds to decline below a net asset value of $1.00 per share.

On October 26, the Division gave assurance to two funds and their affiliated manager that they would not be referred to enforcement for violations of sections 17(a) and 17(d) of the 1940 Act and rule 17d-1 thereunder for entering into an arrangement whereby the parent of the adviser would issue an irrevocable standby letter of credit for the benefit of the funds in the event that a structured investment vehicle (“SIV”) issuer were to fail to make principal or interest payments due on certain of its notes held by the funds. As a result of recent downgrades, the notes are no longer “eligible securities” as defined in rule 2a-7 of the 1940 Act.

Among its representations, the no-action request stated that the letter of credit was set to expire after the maturation date on the downgraded notes and was to be issued at no cost to the funds. Instead, the fee charged by the issuer was to be paid by the adviser. The request further represented that (1) the funds are to draw upon the letter of credit for payment of any scheduled interest payments that are not made, including principal and final interest payment, the day after such payments are due under the notes; (2) the amount of the letter of credit would cover all payment due for the life of and at the maturity of the notes; and (3) the letter of credit would present minimal credit risks to the funds, as determined by the funds’ boards in accordance with rule 2a-7(c)(3)(i).

On November 8 and 9, the Division issued additional letters to two related money market funds proposing identical capital support agreements between the funds and the parent company of their affiliated adviser. The agreements seek to prevent losses realized upon the ultimate disposition of notes purchased by the funds from certain SIV issuers, including the same SIV issuer described in the staff’s October 23 letter. In the two November letters, the parties represented that: (i) the agreements would be entered into at no cost to the relevant fund; (ii) generally upon the sale or other disposition of a note, the agreements would obligate the adviser’s parent company to make a cash contribution to the relevant fund (up to a maximum amount specified in the agreement) sufficient to restore the fund's NAV to the minimum permissible NAV; and (iii) the parent entity would not obtain any shares or other consideration from the fund for making contributions.

The November letters further provide that the affiliate's obligations under the agreement would be guaranteed in the form of a letter of credit for the benefit of the fund issued at the expense of the affiliate by a bank with the highest short-term credit rating. In each case, the fund would draw on the letter of credit in the event that the affiliate fails to make a cash contribution when due under the agreement. Additionally, the agreements would terminate following a change in the letter of credit issuer's short-term credit ratings unless certain substitute conditions were met in a timely fashion.

The November 8 and 9 letters provide no-action assurance not only with regard to Sections 17(a) and 17(d) of the 1940 Act, and rule 17(d)-1 thereunder, but also Section 12(d)(3), which generally makes it unlawful for any registered investment company to acquire any security issued by, or any interest in the business of, any broker-dealer, any person engaged in the business of underwriting, or an investment adviser of an investment company, or an investment adviser registered under the 1940 Act. In the circumstances described in the November 8 and 9 letters, the affiliate's operations include subsidiaries that act as broker-dealers and investment advisers registered with the Commission. The funds could not rely upon the exemption provided under Rule 12d3-1 because the exemption does not extend to affiliated persons of the fund's investment adviser.

The no-action letters can be viewed at:
http://www.sec.gov/divisions/investment/noaction/2007/sticlassic102607-17a.pdf.
http://www.sec.gov/divisions/investment/noaction/2007/seiditpof110807.pdf.
http://www.sec.gov/divisions/investment/noaction/2007/seiditmmf110907.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.

Osterman Named Associate Director in the Division of Investment Management

December 7, 2007 9:31 AM

On November 26, 2007, the SEC announced that Elizabeth G. Osterman has been named Associate Director of Exemptive Applications and Special Projects in the SEC’s Division of Investment Management (“Division”). Ms. Osterman also will oversee a new office in the Division dedicated to special projects. Ms. Osterman has served as Assistant Chief Counsel, Financial Institutions in the Division's Office of Chief Counsel since 2000. From 1997 to 2000, she was Assistant Director in the Division's Office of Enforcement Liaison. From 1994 to 1997, she was Assistant Director in the Office of Investment Company Regulation. She joined that Office in 1991, becoming a Branch Chief in 1992.

The SEC Release on Ms. Osterman’s appointment can be found at: http://www.sec.gov/news/press/2007/2007-242.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 Proposes Streamlined Mutual Fund Disclosure

December 7, 2007 9:28 AM

On November 21, 2007, the SEC published a set of proposed amendments to the forms and rules used by open-end investment companies to register under the Investment Company Act of 1940 (“1940 Act”) and to offer securities under the Securities Act of 1933 (“Securities Act”). As described in last week’s IM News Summary, the SEC voted unanimously on November 15, 2007 to propose these rule changes aimed at improving disclosure provided to mutual fund investors. The proposed amendments include two chief components:

  • a mandatory summary of standardized disclosures to be made by all mutual funds at the outset of the statutory prospectus and
  • an optional method of meeting the prospectus delivery requirements under the Securities Act by the delivery of a summary prospectus that generally includes the same information as the summary section of the statutory prospectus.

First, the proposed amendments would require that the statutory prospectus of every fund include a summary section containing key information, including investment objectives and strategies, risks and costs, in plain English in a standardized order at the front of the prospectus. The summary would also include brief information about the fund’s top ten holdings, investment adviser, portfolio manager(s), purchase and sale procedures, tax consequences, and financial intermediary compensation. A separate summary would be required for each fund included in a prospectus.

Although the mandatory summary section is similar in many respects to the information already required in the risk/return summary, several key differences are notable. The fee table section would contain several new or enhanced disclosures relating to sales charges, portfolio turnover rates, and operating expenses (as affected by fee waivers or expense reimbursements). The proposed amendments would not allow the integration of information for multiple funds as is currently permitted in the risk/return summary, but information for multiple classes of the same fund could be integrated. The proposal seeks comment on whether these changes are appropriate or whether multiple fund or multiple class prospectuses should be eliminated altogether.

Second, the proposed amendments would replace current Rule 498 under the Securities Act, the voluntary profile rule, with a new rule that would permit a fund to satisfy its prospectus delivery obligation under Section 5(b)(2) of the Securities Act by delivering a “summary prospectus” to prospective and existing investors, and making additional information available on the Internet or in paper format on request, including the statutory prospectus, statement of additional information (“SAI”), and most recent annual and semi-annual reports to shareholders on the Internet and in paper format. The summary prospectus would be required to contain the key information that is included in the new summary section of the statutory prospectus in the same order that would be required in the statutory prospectus.

The proposing release states that, if the proposed amendments are adopted, the SEC expects that all initial registration statements on Form N-1A and all post-effective amendments that are annual updates to effective registration statements on Form N-1A that are filed six months or more after the effective date of the amendments would be required to comply with the new rules and forms. Comments are due by February 28, 2008.

The SEC rule proposal, “Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies,” Securities Act Release No. 8861 (Nov. 21, 2007), is available at 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.