Investment Management Industry News Summary

Investment Management Industry News Summary

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SEC staff extends no-action relief regarding broker-dealer customer identification rule

February 25, 2005 3:39 PM

On February 10, 2005, the staff of the SEC Division of Market Regulation issued a no-action letter to the Securities Industry Association extending its earlier no-action position allowing broker-dealers to rely on registered investment advisers to meet customer identification program requirements for shared customers, even though such advisers are not yet subject to an anti-money laundering program rule. The earlier no-action relief was due to expire on February 12, 2005.
Paragraph (b)(6) of the customer identification rule adopted jointly by the Department of the Treasury and the SEC under the USA Patriot Act (the “CIP Rule”) permits broker-dealers to rely on certain other financial institutions to comply with the required elements of the rule for shared customers if, among other things, the other financial institution is subject to an anti-money laundering program rule. Since advisers currently are not subject to an anti-money laundering program rule, they do not meet this condition. Although the Department of the Treasury proposed a rule in May of 2003 requiring certain investment advisers to establish anti-money laundering programs, the rule has not yet been adopted.

The no-action letter reiterates its previous no-action position that a broker-dealer may rely on an adviser in undertaking the requirements of the CIP Rule with regard to shared customers, provided that the following requirements and conditions in paragraph (b)(6) of the CIP Rule are met:

  • such reliance is reasonable under the circumstances;
  • the adviser is regulated by a federal functional regulator; and
  • the adviser enters into a contract requiring it to certify annually to the broker-dealer that it has implemented an anti-money laundering program, and that it (or its agent) will perform specified requirements of the broker-dealer’s customer identification program.

The relief provided by the former no-action letter and extended by the newly issued letter will be withdrawn without further action on the earlier of: (1) the date upon which the anti-money laundering program rule for advisers becomes effective; or (2) July 12, 2006.

Securities Industry Association, SEC No-Action Letter, February 10, 2005

 
 



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

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

SEC to vote on voluntary redemption fee

February 25, 2005 3:37 PM
The SEC has indicated that it may soften its proposed rule that would require mutual funds to impose a 2% redemption fee on shares redeemed within five days of their initial purchase. The SEC will vote next week on a modified plan to permit fund boards to impose the redemption fee voluntarily. The details of this modified plan have not yet been released.

The rule was designed to make short-term trading strategies less profitable, thereby reducing the incentive to engage in market timing. Since the mandatory redemption fee was proposed, various industry participants and observers have objected to rule because of, among other things, the projected costs of complying with the rule as proposed, and uncertainties as to the ability of omnibus account holders to accurately assess redemption fees with respect to the beneficial owners.

Ignites, February 24, 2005
 
 



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

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

ICI Submits Comment Letter on CFA Institute Asset Manager Code of Professional Conduct (the “CFA Institute”)

February 25, 2005 8:19 AM
On February 17, 2005, the ICI submitted a comment letter to the exposure draft of the Asset Manager Code of Professional Conduct (“Code”) issued by the CFA Centre for Financial Market Integrity (“CFA Centre”), a research and policy center of the CFA Institute. The Code was intended to detail the ethical and professional responsibilities of firms that provide asset management services for investors in separate accounts or pooled funds. The comment letter submitted by the ICI contained objections to the Code’s mandatory tone and characterized the Code as embracing a “one-size-fits-all” mentality that prescribes specific solutions to govern an array of complex issues. The ICI also expressed concern that the parties who would be impacted by the Code were not sufficiently involved in the process of developing the exposure draft. The ICI recommended that the CFA Centre discontinue its initiative to finalize the Code, or at minimum clarify that the Code contains voluntary recommendations for firms to consider.
In January of 2005, the Investment Counsel Association of America (“ICAA”) submitted a comment letter to the CFA Centre expressing concerns similar to those of the ICI about the mandatory and specific nature of the Code.

Investment Company Institute Memorandum No. 18490 (February 17, 2005).
 
 



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

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

SEC staff will monitor use of extended lock-up periods to avoid hedge fund adviser registration

February 25, 2005 8:16 AM
In remarks before an educational seminar sponsored by the Managed Funds Association, Paul F. Roye, the Director of the SEC’s Division of Investment Management, warned that the SEC staff will monitor whether investment advisers seeking to circumvent the new hedge fund adviser registration rule, rule 203(b)(3)-2 under the Investment Advisers Act of 1940 (the “Advisers Act”), are extending their redemption provisions on initial and subsequent investments beyond two years to avoid registration with the SEC. Under the new rule, advisers to “private funds” must “look through” the funds and count the number of investors as clients when determining whether the advisers are eligible for the Advisers Act’s exemption for advisers with 14 or fewer clients. Under the new rule, a “private fund” is defined as a fund that, among other things, permits its investors to redeem their ownership interests within two years of purchase. This has been interpreted to include both initial and subsequent purchases of interests. Mr. Roye indicated that investors should question making an investment in funds with lock-up periods of more than two years, remarking that extended lock-ups suggest that the adviser is structuring its operations to avoid oversight by the SEC. Mr. Roye also indicated that the Division will recommend rule revisions to the SEC if this is deemed necessary to promote the effectiveness of the new rule.
Paul F. Roye, Remarks before the Managed Funds Association Educational Seminar Series 2005 Guidance on the SEC’s New Regulatory Framework for Hedge Fund Advisers, February 9, 2005
 
 



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

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

CFTC issues proposal to withdraw interpretation

February 18, 2005 8:30 AM
The CFTC issued a notice (the “Notice”) in which its Division of Clearing and Intermediary Oversight (the “Division”) proposes to withdraw a 1984 staff interpretation (“Interpretation No. 10”) that permits customers of a futures commission merchant (“FCM”), including registered investment companies, to use third-party bank custodial accounts to maintain futures margin under specified conditions.
The CFTC staff issued Interpretation No. 10 to allow third-party custodial accounts to be deemed properly segregated within the meaning of the Commodity Exchange Act (“CEA”) under a series of conditions designed to ensure that FCMs have immediate access to customer funds maintained in such accounts. At the time Interpretation No. 10 was issued, Section 17(f) of the Investment Company Act of 1940 (the “1940 Act”) prohibited registered investment companies from depositing margin with persons, including FCMs and futures clearinghouses, that were not eligible custodians of the companies’ assets. Since 1984, however, many of the conflicts that Interpretation No. 10 was intended to address (i.e., between the segregation requirements applicable to FCM customer funds under the CEA and the custody requirements applicable to registered investment companies under the 1940 Act) have been eliminated. For example, Rule 17f-6 under the 1940 Act permits registered investment companies to maintain assets with an FCM in connection with futures transactions effected on U.S. and foreign exchanges, provided that the FCM is not an affiliate of the investment company.

In the Notice, the Division proposes to withdraw Interpretation No. 10, except to the extent that an FCM would not be eligible to hold investment company assets under Rule 17f-6 (i.e., because the FCM is an affiliate of the investment company or its adviser). In proposing to withdraw Interpretation No. 10, the Division reasons that potential systemic liquidity risks could result from any potential diversion of FCM capital to cover undermargined customer accounts, particularly in times of market volatility. In addition, the Division indicates that third-party custodial accounts present some uncertainty as to the treatment of funds in the event of an FCM insolvency and some potential for funds to be released without the prior knowledge or consent of the FCM.

The Notice requests comment on:

  • whether withdrawal of Interpretation No. 10 would have any adverse impact on institutional customers, such as registered investment companies, or their ability to participate in the futures market;
  • whether there are any legal or prudential considerations that support the use by institutional customers of third-party custodial accounts in effecting futures transactions;
  • the costs and expenses incurred by FCMs, including financing and potential opportunity costs, in connection with maintaining third-party accounts relative to regular customer accounts; and
  • whether a six-month transition period would be sufficient for FCMs and banks to make the necessary adjustments in existing third-party custodial arrangements if the Division withdraws Interpretation No. 10.

Comments on the proposal are due by April 4, 2005.

Investment Company Institute Memorandum No. 18550 (February 16, 2005).

 
 



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

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

NASD Charges Fund Underwriter With Improperly Rewarding Brokerages

February 18, 2005 8:26 AM

On February 16, 2005, the NASD charged the distributor of a large mutual fund complex with improperly rewarding and encouraging broker dealers that sold its product. The NASD alleged that the distributor violated the NASD's anti-reciprocal rule by directing approximately $100 million in brokerage commissions over a three-year period to about 50 brokerage firms that were top sellers of the funds that it distributes.

Specifically, the NASD alleged that the distributor:

  • using a formula based on brokerage firms’ prior-year fund sales, calculated “target commissions” that it intended to direct to each of the top-selling retailers of the funds;
  • told each brokerage firm the specific amount of that concern's target commissions for the upcoming year and discussed with the top-selling brokerage firms the benefits that the distributor expected to receive as a result of the arrangements, such as “preferred fund” or “recommended fund” status and enhanced access to a firm's sales forces; and
  • provided a chart to the trading desk at the distributor's parent company (which also is the investment adviser to the funds) listing each of the top-selling brokerage firms and the amount of target commissions for each firm. The trading desk then allegedly directed brokerage commissions on fund portfolio transactions to the brokerage firms listed on the chart.

The NASD stated that the trades, which allegedly were compensation for past sales and to ensure preferential future treatment, violated the NASD’s anti-reciprocal rule. The anti-reciprocal rule is designed to prevent “quid pro quo arrangements” in which a fund’s brokerage commissions are used to compensate brokerage firms for selling the fund’s shares. The NASD stated that these commissions come from the assets of a mutual fund's shareholders.

The NASD’s prior regulatory actions regarding directed brokerage arrangements have focused more on retail firms that received directed brokerage payments from mutual fund companies in exchange for giving preferential treatment to their funds, rather than on fund companies offering to make such payments.

BNA Securities Law Reporter Volume 37 Number 8 Monday, February 21, 2005
 
 



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

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

Group Publishes Report on Board Self-Assessment

February 18, 2005 8:23 AM

The Independent Directors Council issued a report addressing the new requirement in the SEC’s most recent governance rules that all boards perform annual self-assessments. The report, which was prepared by an 11-member task force of mutual fund directors, is intended to provide guidance to mutual boards implementing the requirement. It outlines issues that boards should consider, including how to conduct a self-assessment and what topics should be included in a self-assessment.

 
A copy of the report, entitled “Board Self-Assessments: Seeking to Improve Mutual Fund Board Effectiveness,” is may be found at www.idcl.org.

 
 



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.

Paul F. Roye, Director of the Division of Investment Management, announces intention to leave the SEC

February 18, 2005 8:21 AM

Paul F. Roye, Director of the SEC’s Division of Investment Management, announced today that he intends to leave the SEC in the coming weeks. Mr. Roye plans to pursue opportunities in the private sector. Mr. Roye became the Director of the Division of Investment Management in 1998. Before becoming Director of the Division of Investment Management, Mr. Roye was with a law firm, which he joined in 1982 and before that, began his career in the Division of Investment Management where he worked from 1979 to 1982.

SEC Press Release 2005-18 (February 18, 2005)

 
 



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

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

NASD amends rules governing pre-dispute arbitration disclosure

February 11, 2005 10:06 AM
The SEC has approved the NASD’s proposal to amend NASD Rule 3110(f) to enhance the disclosures that member firms must provide to customers about the arbitration process. The amendments become effective on May 1, 2005. Among the amendments approved were the following:
  • Rule 3110(f)(1) was amended to require that any pre-dispute arbitration clause be highlighted, and preceded by the following language, which also is required to be highlighted:

“This agreement contains a predispute arbitration clause. By signing an arbitration agreement, the parties agree as follows

  1. All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
  2. Arbitration awards are generally final and binding; a party’s ability to have a court reverse or modify an arbitration award in is very limited.
  3. The ability of the parties to obtain documents, witness statements, and other discovery is generally more limited in arbitration than in court proceedings,
  4. The arbitrators do not have to explain the reason(s) for their award.
  5. The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
  6. The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.
  7. The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.”
  • New Rule 3110(f)(2)(B) clarifies that if an agreement contains a predispute arbitration clause, a copy of the agreement must be to the customer, and the customer must acknowledge receipt of the agreement at the time the agreement is signed. The acknowledgement of receipt may be in the document itself, or on a separate document.
  • Rule 3110(f)(3) has been amended to require that members must provide a customer with a copy of any predispute arbitration agreement or customer agreement that the customer has signed, inform the customer if it does not have a copy of an agreement, within ten business days of receiving the customer’s request. The firm also must provide the customer with the names of, and information on how to contact or obtain the rules of, all arbitration forums in which a claim may be filed under the agreement.
  • Rule 3110(f)(4)(A) was amended to expressly prohibit any predispute arbitration agreements from including any condition that would:
  1. Limit or contradict the rules of any SRO;
  2. Limit the ability of a party to file any claim in arbitration;
  3. Limit the ability of a party to file any claim in court that could otherwise be filed in court under the rules of the forum(s) in which a claim may be filed under the agreement; or
  4. Limit the ability of arbitrators to make any award.

Predispute Arbitration Agreements, NASD Notice to Members 05-09 (January 2005).

 
 



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

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

NASD approves an amendment to the Code of Arbitration Procedure

February 11, 2005 10:04 AM
On January 27, 2005, the NASD Board of Governors announced that it has approved an amendment to the Code of Arbitration Procedure, which will allow customers arbitrating disputes with brokers to require a written explanation of the arbitration panel’s decision. Customers must make their request for a written explanation before the arbitration panel holds its first hearing. The amendment will change the current rule, which provides that the decision to issue such a written explanation is entirely within the discretion of an arbitration panel. The amendment is subject to SEC approval.

New Arbitration Rule Requires Award Explanations Upon Investors Request, NASD News Release (January 27, 2005).
 
 



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

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

Federal District Court holds there is no private right of action under Section 36(a) of the Investment Company Act of 1940

February 11, 2005 9:51 AM

A group of fund shareholders filed a class action complaint against the funds’ investment advisers alleging that the advisers had breached their fiduciary duty by implementing a scheme in which the funds would issue rights to their common shareholders, in violation of Section 36(a) of the Investment Company Act. In granting the defendant’s Motion to Dismiss, the United States District Court of the Eastern District of New York held that there is no private cause of action under Section 36(a) of the Investment Company Act.

Chamberlain v. Potapchuk, 02 CV 5870 (SJ) (EDNY 2005).

 
 



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

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

SEC adopts rule for voluntary data tagging in reports filed on EDGAR

February 11, 2005 8:59 AM

On February 3, 2005, the SEC announced that it has adopted new Rule 401 to Regulation S-T to establish a program to permit registrants, in connection with reports filed under the Securities Exchange Act of 1934 or Investment Company Act of 1940 to voluntarily file supplemental tagged financial information in certain specified EDGAR filings using the eXtensible Business Reporting Language (“XBRL”) format. Registrants choosing to participate in the voluntary program would continue to file their financial information in HTML or ASCII format, as currently required. The voluntary program is intended to help the SEC evaluate the usefulness of data tagging in general, and XBRL in particular, to registrants, investors, the Commission and the marketplace generally. The new rules go into effect on March 16, 2005.

XBRL Voluntary Reporting Program on the EDGAR System, Investment Company Act Release No. 26747 (February 3, 2005).

 
 



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

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

SEC staff issues no-action letter regarding voting securities and Section 17(a) of the Investment Company Act of 1940

February 11, 2005 8:56 AM
The SEC staff has said that certain units of beneficial interest issued by a Bermuda unit trust would not be “voting securities” as defined in Section 2(a)(42) of the Investment Company Act, solely for purposes of determining whether the Section 17(a) prohibition against a registered investment company engaging in principal transactions with an affiliated person would apply to the fund’s purchase and redemption of trust units.
The staff noted that the Commission has taken the position that the holder of non-voting securities may be considered to hold the equivalent of a voting security if the holder “has the power to exercise control over how the issuer is managed.” For example, the staff discussed its approach to limited partnership interests, where the staff has deemed the equivalent to a voting security to exist when limited partners have the following rights: (i) to remove or replace the general partner; (ii) to vote on the election or removal of the general partner in the event of the general partner’s death, insanity, or retirement; (iii) to terminate the partnership if one of the initial managing general partners ceases to serve in that role; and (iv) to take part in the conduct or control of the limited partnership’s business. The staff also takes the position that a limited partnership interest may be a voting security if a limited partner has an economic interest giving it the power to exercise a controlling influence over the partnership, or if it gives limited partners the de facto power to determine or influence the determination of the identity of the issuer’s directors.

Under the facts and circumstances presented in this letter, the staff agreed that a registered investment company’s ownership of units issued by a trust would not be a voting security solely for purposes of Section 17(a). The staff relied principally on the following representations in taking this position:

  • Bermuda law and the trust deed conferred no power on the unitholders to vote on the election or removal of the trustee or investment manager or to exercise control over the trust;
  • The registered fund and certain private funds managed by the same investment adviser will not be the only investors in the trust, and neither will contribute the bulk of the assets of a trust;
  • A third party investment manager unaffiliated with the fund’s investment adviser is solely responsible for the selection and compensation of the subadvisers of the trust;
  • The trusts has directors, and no entity performs functions similar to that of a director except the third party investment manager, subadvisers, and the trustee of the trust;
  • If the registered fund or private funds were dissatisfied with the management of the trust, their only remedy would be to redeem their interest in the trust; and
  • The registered fund’s investment in the trust will be on terms that are substantially the same and no less advantageous than the private funds’ investments in the trust.

Wells Fargo Alternative Asset Management, LLC, SEC No-Action Letter (avail. Jan. 26, 2005).

 
 



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

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

Non-cash compensation rules proposed for college savings plans, other municipal securities

February 4, 2005 10:38 AM
On January 13, 2005, the MSRB filed with the SEC proposed amendments to MSRB Rule G-20, relating to gifts, gratuities and non-cash compensation in connection with the sale of municipal fund securities (i.e., interests in Section 529 college savings plans) and other primary offerings of municipal securities. The proposed amendments are intended to more closely conform the MSRB’s rules to those of the NASD, and thus facilitate greater understanding and compliance by broker-dealers.
MSRB Rule G-20 currently prohibits broker-dealers from directly or indirectly giving or permitting to be given any thing or service of value in excess of $100 per year to any person, other than an employee or partner of the broker-dealer, in relation to the municipal securities activities of the recipient’s employer. The rule provides certain exemptions for “normal business dealings,” which include (i) occasional gifts of meals or tickets to theatrical, sporting, or other entertainment; (ii) sponsoring legitimate business functions that are recognized by the IRS as deductible business expenses; and (iii) gifts of reminder advertising. However, such gifts must not be so frequent or excessive as to appear improper.

The MSRB’s proposed amendments to Rule G-20:

  • Modify the provision regarding occasional gifts of meals, sports, entertainment tickets, by requiring that broker-dealer personnel attend such meals, entertainment events, and business functions and expressly stating that such gifts must not call into question the dealer’s ethical standards;
  • Incorporate definitions of “non-cash compensation,” “cash compensation,” and “offeror” based on language in NASD Rules 2710, 2820, and 2830 and expansion of the definition of offeror to include, with respect to securities held as assets underlying municipal fund securities, any person considered an offeror under relevant NASD rules;
  • Treat non-cash sales incentives relating to municipal fund securities and other primary offerings of municipal securities (i.e., bonds and notes) in a manner similar to NASD’s treatment of non-cash sales incentives relating to mutual funds, variable contracts, and corporate debt and equity offerings. Among other things, the rule would permit gifts that do not exceed $100 per individual per year and are not preconditioned on achievement of a sales target, and the gift or receipt of occasional gifts of meals or tickets to theatrical, sporting and other entertainment, but only if such occasional gifts are not preconditioned on achievement of a sales target;
  • Limit the circumstances under which broker-dealers or offerors may pay or reimburse costs of training or education, based on NASD rules, such as by requiring that attendance at, and payment for, such meetings is not preconditioned on achievement of a sales target, reimbursement is not applied to expenses of associated persons’ guests, and meetings be held at appropriate locations;
  • Require that non-cash compensation arrangements include the total production and equal weighting requirements used under NASD rules, so that the arrangement does not favor sales of one municipal security over another; and
  • Amend the recordkeeping requirements in Rule G-8 to require broker-dealers to maintain certain records relating to non-cash compensation and internal sales incentive programs.

The MSRB Notice states explicitly that it intends generally that the provisions of Rule G-20 be read consistently with the analogous NASD provisions, unless the MSRB specifically indicates otherwise. The MSRB stated that relevant NASD interpretations would be presumed to apply to MSRB rule provisions, subject to the MSRB’s making distinctions needed in the context of municipal fund securities and other primary offerings of municipal securities.

Notice of Filing of Proposed Rule Change Relating to Amendments to Rule G-20, on Gifts and Gratuities, and Rule G-8, on Recordkeeping, MSRB Notice 2005-05 (January 13, 2005).

 
 



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

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

The SEC approves NASD rule amendments concerning the national do-not-call registry

February 4, 2005 10:36 AM
The SEC has approved proposed amendments to NASD Rule 2212, which regulates telemarketing by member firms and contains a safe harbor relating to telephone numbers registered with the Federal Trade Commission’s national do-not-call registry. The rule amendments require members wishing to qualify for the safe harbor to implement a process to prevent telephone solicitations to any telephone number that appears in the national do-not-call registry, as obtained from the administrator of the registry no more than 31 days prior to the date any call is made. The effective date of the new rule amendment is March 1, 2005.
In 2003, the FTC and FCC established requirements that sellers and telemarketers participate in a national do-not-call registry. These requirements generally prohibit companies from making telephone solicitations to consumers whose phone numbers are registered on the national do-not-call registry.

NASD Rule 2212 generally prohibits members and their associated persons from initiating telephone solicitations to persons whose telephone numbers are registered on the national do-not-call registry. The rule contains a “safe harbor” for members whose routine business practices meet certain specified standards, which include written procedures, training, and a process for ensuring that the member uses a current list of do-not-call numbers from the national registry. Previously, the rule required that members use a version of the do-not-call registry obtained from the administrator of the registry no more than three months before a telephone solicitation. The amended rule will require that members use a version of the registry obtained no more than 31 days prior to a telephone solicitation.

Do-Not-Call Registry, NASD Notice to Members 05-07 (January 2005).
 
 



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

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

SEC asks court to delay consideration of Financial Planning Association (“FPA”) suit

February 4, 2005 10:34 AM
In an unopposed motion filed on January 19, 2005, the SEC asked the U.S. Court of Appeals for the District of Columbia Circuit to delay until April 15, 2005, consideration of the FPA’s suit challenging the SEC’s proposed fee-based brokerage rule under the Investment Advisers Act of 1940 and a related SEC staff no-action position. April 15, 2005 is the date the SEC expects to adopt a final rule with respect to broker-dealers that offer fee-based brokerage services.
The FPA asserts that the 1999 rule proposal harmed both investors and registered investment advisers by permitting broker-dealers to provide clients with investment advice without being subject to the fiduciary standards of the Investment Advisers Act. The FPA further argued that the SEC staff violated the Administrative Procedures Act by effectively adopting the rule proposal through its grant of no-action relief. However, after the FPA filed its action, the SEC reproposed the rule for public comment and withdrew the no-action position, replacing it with a temporary rule expiring on April 15, 2005.

BNA Securities Regulation and Law Report, Volume 37 Number 4 (January 24, 2005).
 
 



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

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

SEC settles two IPO allocation cases

February 4, 2005 10:13 AM

The SEC announced that it has settled two lawsuits brought against investment banks relating to the firms’ allocation of securities issued in initial public offerings to institutional customers. The SEC alleged that the firms had violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by inducing and attempting to induce customers who received IPO allocations to purchase additional shares in the aftermarket during the restricted period (i.e., before the firms had completed their participation in the IPOs). Under the terms of the settlements, each firm will be enjoined from violating Rule 101 of Regulation M and required to pay a $40 million civil penalty. Neither firm admitted or denied the allegations in the SEC’s complaints, and the settlement terms are subject to court approval.

Rule 101 of Regulation M prohibits underwriters, during a restricted period prior to the completion of their participation in the distribution of IPO shares, from bidding for, purchasing, or attempting to induce any person to bid for or purchase any offered security in the aftermarket. The rule is intended to prevent activities that could artificially influence the market for the offered securities.

The SEC alleged that one firm violated Rule 101 by

  • telling certain customers that they could obtain good allocations of “hot” IPOs if they expressed an interest in buying shares in the immediate aftermarket;
  • soliciting aftermarket interest from customers that the firm knew had no interest in owning the shares for the long term, resulting in the customers flipping both their IPO allocations and aftermarket purchases;
  • suggesting to certain customers the aftermarket price limits they should give in order to obtain a good IPO allocation;
  • in certain cases encouraging customers to increase the aftermarket prices they originally said they would be willing to pay;
  • accepting customers’ indications that they would purchase shares in the aftermarket interest equal to or greater than their IPO allocations (such as “1 for 1” or some other ratio); and
  • in one case, soliciting an aftermarket order from a customer before all of the IPO shares had been distributed, which the firm executed once trading began. This customer sold both its IPO and aftermarket shares the same day.

In the other case, the SEC alleged that the firm violated Rule 101 of Regulation M by

  • telling certain customers that the firm considered purchases in the immediate aftermarket to be significant in the determination of IPO allocations, telling them that the firm verified whether customers placed orders to purchase stock in the immediate aftermarket following an IPO, and asking customers during restricted periods whether, and at what prices and in what quantities, they intended to place orders to purchase IPO stock in the immediate aftermarket;
  • encouraging certain customers that had expressed interest in buying shares in the aftermarket to increase the prices that they would pay;
  • seeking and/or accepting aftermarket interest from customers based solely, or in relevant part, on the amount of their prospective allocations.

Securities and Exchange Commission v. Morgan Stanley & Co. Incorporated, Civil Action No. 1:05 CV00166 (HHK) (D.D.C.), Litigation Release No.19050 (Jan. 25, 2005); Securities Exchange Commission v. Goldman Sachs & Co., 05 CV 853 (SAS) (S.D.N.Y), Litigation Release No. 19051 (Jan. 25, 2005). 

 
 



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

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