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 approves expansion of soft dollar safe harbor to include principal transactions December 27, 2001 12:39 PM The SEC recently published interpretive guidance on the application of section 28(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Section 28(e) provides a safe harbor for money managers who use commission dollars to obtain research and brokerage services. Under the section 28(e) safe harbor, money managers may use commission dollars to obtain research and brokerage services without being deemed to have breached a fiduciary duty, provided the conditions of the section are met. The SEC clarified that, for purposes of the section 28(e) safe harbor, the term "commission" encompasses, among other things, certain transaction costs, even if not explicitly called a "commission." Previously, the SEC interpreted section 28(e) to apply only to research and brokerage services obtained through commissions paid to a broker-dealer for agency transactions. In an agency transaction, a broker-dealer acts for the accounts of others by buying or selling securities on behalf of customers. The broker-dealer charges a commission for providing the transaction service which is required to be disclosed. 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. |
The Investment Council Association of America (“ICAA”), urges the SEC not to exempt savings associations and thrifts from investment adviser registration December 27, 2001 10:56 AM Pursuant to the Act, banks are now included within the definition of “investment adviser” to the extent that they act as investment advisers to investment companies. Banks that do not advise investment companies continue to be excluded from the definition of “investment adviser.” Because the term “bank” does not encompass savings associations and other thrift institutions, thrift institutions have always been subject to SEC regulation under the Advisers Act when they provide advice regarding securities for compensation. While the Gramm-Leach-Bliley Act did not change the application of the Advisers Act to thrifts, the Act did amend the 1940 Act to allow thrift institutions to sponsor common and collective trust funds. These types of funds are exempt from registration under the 1940 Act. The thrifts have argued that in order to be placed on a level playing field with banks regarding offering common and collective trust funds, the SEC should use its rule making authority to exempt thrifts from the Advisers Act to the extent that they engage in bona fide fiduciary activity. The ICAA notes that the SEC is currently working on an exemptive rule for thrifts in this area. If an exemption is to be granted, the ICAA urges the SEC to craft the exemption narrowly to encompass only those traditional trust activities that have been long considered to be outside the core functions of an investment adviser. The ICAA cites the following reasons for its position:
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 definition for "qualified purchaser" under the Securities Act of 1933 (the "Securities Act") December 20, 2001 12:44 PM On December 20, 2001, the SEC proposed a definition of "qualified purchaser" under the Securities Act to implement a provision of the National Securities Markets Improvement Act of 1996 ("NSMIA"). The proposed definition mirrors the current definition of accredited investor under Regulation D of the Securities Act. The SEC noted that the proposal should facilitate capital formation, implement the Congressional intent of NSMIA, impose uniformity in the regulation of transactions with financially sophisticated persons and reduce burdens on capital formation. The SEC also noted that this new qualified purchaser definition identifies well-established categories of persons who are financially sophisticated and therefore not in need of the protection of state registration when they are offered or sold securities. With NSMIA, Congress realigned the federal and state regulatory partnership governing registration of securities offerings. Under NSMIA, the SEC retains authority to require registration of securities offerings while states are preempted from requiring registration of offerings involving "covered securities" including, among other securities, any security offered or sold to a "qualified purchaser." Congress authorized the SEC to define the term "qualified purchaser" under the Securities Act to include "sophisticated investors, capable of protecting themselves in a manner that renders regulation by State authorities unnecessary," thus preempting securities transactions with these persons from state "blue sky" law. The SEC commented that NSMIA's legislative history indicates that qualified purchasers for purposes of the Securities Act preemption of state regulation should include investors that, by virtue of their financial sophistication and ability to fend for themselves, do not require the protections of registration under the state securities laws. The SEC acknowledged that there are a number of existing definitions in the federal securities regulatory framework, other than accredited investor, concerning financially sophisticated investors that could be used to implement the qualified purchaser concept under the Securities Act. These definitions include, among others:
However, the SEC determined that the legislative intent of NSMIA makes using "accredited investor" more appropriate than any of these alternatives. All comments on the proposed definition must be received on or before February 25, 2002. SEC Release No. 33-8041, December 20, 2001. 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. |
Association for Investment Management and Research ("AIMR") proposes guidelines for investment managers on trade execution December 12, 2001 1:19 PM AIMR has released for comment a set of trade management guidelines it has compiled for investment management firms to assist them in executing investment trades and managing the trading function. AIMR noted that it intends the guidelines to be a compilation of best practices and that it encourages firms to adopt as many of the recommended guidelines as possible. AIMR stated that the guidelines identify industry best practices and are meant to assist firms in meeting their fiduciary responsibility to act in the best interest of clients. The guidelines define best execution as "the trading process most likely to maximize the value of client portfolios." AIMR notes that this definition recognizes that best execution is intrinsically tied to the decisions regarding portfolio value and cannot be evaluated independently and recognizes that while best execution may have aspects that can be measured and analyzed over time, accurate measurement on a trade-by-trade basis may not be feasible. The guidelines recommend firms consider actions in the following three areas: Processes. AIMR recommends that firms establish formal policies and procedures that have the ultimate goal of maximizing the asset value of client portfolios through best execution. AIMR recommends that firms accomplish this by:
Disclosures. AIMR recommends that an investment management firm disclose its trade management practices and any actual and potential trading related conflicts of interest to all current and prospective clients. AIMR recommends that a firm:
Recordkeeping. AIMR recommends that an investment management firm maintain meaningful and complete trading records. AIMR notes firms should strive to:
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 Commissioner releases report recommending improvements to Regulation Fair Disclosure December 12, 2001 1:16 PM SEC Commissioner Laura Unger recently released a report on Reg FD with recommended improvements to the rule to increase marketplace information. In her report, Ms. Unger recommended that the SEC:
Ms. Unger noted that some corporate issuers may be making fewer future projections to avoid inadvertently triggering Reg FD. In these cases, the report urges the SEC to consider expanding the safe harbor for forward-looking information in the Private Securities 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 warns public companies to disclose critical accounting policies December 12, 2001 1:02 PM On December 12, 2001, the SEC issued cautionary advice to public companies urging them to disclose their "critical accounting policies." In its release, the SEC reminded management, auditors, audit committees and their advisors that the selection and application of the company's accounting policies "must be appropriately reasoned." The SEC reminded registrants that even a technically accurate application of generally accepted accounting principles ("GAAP") may still fail to communicate important information if it is not accompanied by appropriate and clear analytic disclosures regarding the company's financial status and the possibility, likelihood and implication of changes in the company's financial and operating status. The SEC noted that it intends to consider new rules during 2002 to elicit more precise disclosures about the accounting policies that company management believes are most important to the portrayal of the company's financial condition and results. The SEC also noted, however, that prior to new rulemaking, it felt it necessary to encourage public companies to include in the Management's Discussion and Analysis ("MD&A"), full explanations in plain English of:
The SEC noted that investors may lose confidence in a company's management and financial statements if sudden changes in its financial conditions and results occur and if these changes were not preceded by disclosures about the susceptibility of the reported amounts to change. To minimize this loss of confidence, the SEC advised public companies about the importance of employing a disclosure regimen which includes the following:
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. |
IARD annual shutdown: December 22 through January 1 December 10, 2001 1:33 PM The Investment Adviser Registration Depository will be shut down from December 22, 2001 through January 1, 2002 to process state notice filing and registration renewals. The SEC noted that this shutdown is an annual, routine procedure that corresponds to the annual shutdown of the Central Registration Depository, the broker-dealer electronic filing system. During the shutdown, advisers can work on filings and save them as “pending” filings. Advisers, however, will not be able to submit filings.
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 guidance on fund names rule December 4, 2001 2:13 PM On December 4, 2001, the SEC's Division of Investment Management released a set of answers to frequently asked questions (the "FAQ") on new rule 35d-1 under the Investment Company Act of 1940 (the "1940 Act"). Rule 35d-1 addresses the categories of investment company names that are likely to mislead investors about an investment company's investments and risks. The FAQ generally addresses the following: Fund names which invoke the rule. The SEC noted that the following terms would normally invoke application of rule 35d-1:
Fund names which do not invoke the rule. The SEC also noted that the following terms would normally not invoke application of rule 35d-1: The FAQ also addresses questions regarding whether shareholder approval is required for adoptions of or changes to investment policies to comply with rule 35d-1 and the form of notice to shareholders of a change in the 80% investment policy. Funds must be in compliance with rule 35d-1 by July 31, 2002. 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 cautionary advice regarding use of pro forma financial information December 4, 2001 1:49 PM On December 4, 2001, the SEC warned companies about its view of the use of certain financial statements which are calculated on the basis of methodologies other than Generally Accepted Accounting Principles ("GAAP") (i.e., pro forma financial statements). The SEC noted that it believes that, with appropriate disclosures about their limitations, pro forma financial statements can be useful to investors. However, the SEC noted that it is concerned that pro forma financial information, under certain circumstances, can mislead investors if it obscures GAAP results. The SEC also noted that because pro forma financial information departs from traditional accounting conventions, it may be difficult for investors to compare an issuer's financial information with other reporting periods and with other companies. The SEC issued the advisory to alert public companies and their advisors of the following concepts:
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’s Director of Division of Enforcement comments on recent actions regarding investment company and investment adviser supervisory procedures December 4, 2001 1:40 PM At a recent conference, Stephen M. Cutler, the SEC’s Director of the Division of Enforcement, commented on various enforcement actions involving failure of supervisory procedures of investment companies and investment advisers. He warned attendees to consider the following concepts regarding when evaluating their own supervisory procedures: A firm may outgrow its supervisory procedures. Mr. Cutler commented on an enforcement action regarding an investment advisory firm’s soft dollar practices. He noted that the firm grew substantially from 1990 through 1996. He further noted that the firm had disclosed to its clients certain categories of products and services it might obtain using soft dollar credit, but that it failed to disclose that it would use soft dollars for personal and non-research business travel, marketing expenses and other administrative expenses. Mr. Cutler commented that the firm gave the firm’s treasurer the sole responsibility for the firm’s soft dollar program without giving the treasurer any training and without creating a system of follow-up or review to ensure that soft dollar payments were properly monitored. The SEC found, among other things, that the firm had failed - and the treasurer had aided and abetted the failure - to disclose material information about the firm’s use of soft dollars. The SEC also charged the firm with failure to supervise. Mr. Cutler noted that the treasurer’s on-the-job training and the firm’s lack of follow-up procedures may have been sufficient when the firm had only a few soft dollar relationships but that these became more problematic as the firm’s size and use of soft dollars increased. As a corollary to a firm outgrowing supervisory procedures, Mr. Cutler also noted another enforcement action where an investment advisory firm had failed to extend its supervisory policies to a senior portfolio manager who was also a member of the firm’s executive committee. The senior portfolio manager engaged in a portfolio pumping scheme despite the presence of firm procedures designed to detect such trading activity. Mr. Cutler warned that regardless of title or seniority, an investment advisory employee never outgrows the need for supervision. Supervisory procedures require checks and balances. Mr. Cutler noted that a recent settled action involving an investment adviser’s failure to supervise the actions of a subadviser and its portfolio manager illustrated the need for functional separation. Mr. Cutler also noted that the subadviser’s supervisory procedures would have been stronger if a supervisor without a direct interest in the performance of the funds subadvised had the responsibility of monitoring the portfolio manager. A firm should recognize that supervisory responsibility does not end with organizational boundaries. Mr. Cutler warned that in the above-mentioned failure to supervise case, the investment adviser was also charged with failure to supervise even though the portfolio manager was an employee of the subadviser, not the adviser. He commented that the investment subadvisory agreement specifically stated that the subadviser’s provision of investment advisory services was subject to the supervision of the adviser. He noted that the adviser clearly assumed supervisory responsibility for the portfolio manager even though she was an employee of the subadviser. He also noted that even if the subadvisory agreement did not specify the adviser’s assumption of supervision, the nature of the relationship between the adviser and the portfolio manager established that the adviser was a supervisor. In particular, the SEC noted that the adviser was involved in the portfolio manager’s appointment and that when the portfolio manager was dissatisfied with resources at the subadviser, she complained to the adviser. Mr. Cutler noted that these “indicia of a mutually recognized supervisory relationship” can establish liability even absent a written reservation of supervisory authority. Mr. Cutler then made the following recommendations to advisers when supervising a subadviser:
Mr. Cutler also commented on the SEC’s real-time enforcement program and the agency’s framework for evaluating a company’s cooperation in determining whether and how to charge the company with violations of the federal securities laws. 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. |
Compliance alert regarding after-tax disclosure December 3, 2001 2:01 PM The SEC has also contacted funds regarding their web sites and the requirement to comply with the new rules regarding after-tax disclosure. As of December 1, 2001, all advertising containing after-tax returns or for funds which purport to have tax management advantages must comply with the new rules. 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. |
Compliance alert for money market funds December 3, 2001 1:55 PM The SEC has reportedly contacted some money market funds regarding the continuing decrease in money market fund yields. Specifically, money market funds have been contacted regarding their contingency plans should the fund produce a negative return ( i.e., fund expenses exceed fund yields). Investment advisers to money market funds are reportedly considering whether to waive or lower fees on at least a temporary basis. 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. |