Investment Management Industry News Summary - February 2008

Investment Management Industry News Summary - February 2008

Publications

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

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

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SEC Proposes Rules Requiring Investment Companies to Disclose Divestment of Sudanese Securities

February 19, 2008 3:57 PM  
On February 13, 2008, the SEC proposed rules that would require registered investment companies to disclose when they divest securities of issuers that the investment company determines conduct or have directed investments in certain business operations in Sudan. The SEC is required to prescribe these new rules by The Sudan Accountability and Divestment Act (the “Act”).

The new rules would require each registered investment company that divests securities in accordance with the Act to disclose the divestment on its next periodic report on Form N-CSR or Form N-SAR filed following the divestment. The proposed amendments would require disclosure of the issuer's name; exchange ticker symbol; CUSIP number; total number of shares or, for debt securities, principal amount divested; and dates that the securities were divested.

Public comment on these proposed rule and form amendments should be received by the SEC no later than 30 days after their publication in the Federal Register.

The SEC proposed rule release can be found at: http://www.sec.gov/rules/proposed/2008/34-57306.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 Settles Late Trading Case With Hedge Fund and its Adviser

February 19, 2008 3:51 PM  
On February 5, 2008, the SEC announced that it settled an enforcement action against a hedge fund, an SEC registered investment adviser and its employees for allegedly late trading in mutual fund shares. The SEC alleges that between 2001 and 2003 the investment adviser, using market information to make investment decisions, placed thousands of late trades on behalf of the hedge fund in mutual fund shares, receiving the NAV determined earlier in the day. The hedge fund and investment adviser were ordered to disgorge $30 million in profits and to pay over $2.5 million in civil fines. The hedge fund, investment adviser and its employees were also ordered to cease and desist from committing or causing future violations of the antifraud and other provisions of the federal securities laws.

A copy of the SEC Order can be found at: http://www.sec.gov/litigation/admin/2008/33-8890.pdf 
                                             
This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.

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

SEC Issues Final Rule Release on Electronic Filing of Form D

February 19, 2008 3:44 PM  

On February 6, 2008, the SEC issued a final rule release requiring the electronic filing of Form D. Beginning September 15, 2008, Form D may be filed electronically, although paper filings will still be accepted. On March 16, 2009, paper filings will no longer be accepted and all filings must be submitted electronically.

Some of the changes and new requirements under the final rule include:

Mechanics of Filing Form D

  • Form D will be required to be filed electronically.
  • Form D will be accessible to the public with internet access.

Information Required in Form D

  • Issuers are no longer required to report 10 % or greater owners of the issuer’s securities.
  • Issuers are no longer required to write a description of their business and now are required to select the industry applicable to their business from a standardized list.
  • Issuers are required to provide a revenue range, or net asset value range information in the case of hedge funds (issuers will be given the option to “Decline to Disclose” that information or to specify that such information is “Not Applicable.”).
  • Hedge funds are required to report any exemptions from the Investment Company Act of 1940 upon which they rely.
  • Issuers are required to report the date of first sale and whether the offering is expected to continue for more than a year.
  • Issuers are required to disclose information relating to persons and entities receiving selling commissions (i.e., CRD numbers)
  • Issuers are no longer requires disclosure of use of proceeds and expenses (except for selling commissions and payments of officers and directors and other persons related to the issuer).
  • Issuers are required to disclose selling commissions and finders’ fees.
  • Issuers are required to disclose the use of proceeds to pay officers, directors and certain other persons related to the issuer.

The final rule release can be found at: http://www.sec.gov/rules/final/2008/33-8891.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, FINRA and NASAA Announce Initiative to Protect Seniors; SEC Comment Request

February 19, 2008 3:42 PM  

On February 8, 2008, the SEC, FINRA and NASAA announced a new initiative in an effort to better protect seniors. The securities regulators will solicit input from interested parties in order to identify effective supervisory, compliance and other practices used by securities firms in dealing with seniors and distribute this information to the industry. This recent initiative is one component of a coordinated national effort to protect seniors from investment fraud and sales of unsuitable securities that was announced by the SEC, NASAA and FINRA in May 2006. The other components include targeted examinations, enforcement of the securities laws in cases of fraud against seniors, and active investor education and outreach.

A copy of the SEC Press Release can be found at: http://www.sec.gov/news/digest/2008/dig020808.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 Issues Notices Regarding Exemption for Actively Managed ETFs

February 19, 2008 3:24 PM  

The SEC has recently issued several notices relating to requested exemptive relief to enable the creation of actively managed exchange traded funds (“ETFs”). Unlike traditional ETFs, which are typically composed of underlying securities based on an index, actively managed ETFs have a pool of investments that is managed by an investment adviser.

In general, the relief sought by the applicants seeking to launch actively managed ETFs is similar to the relief sought by typical EFT sponsors, that is: (a) the issuance of shares of an open-end management investment company (“Creation Units”) redeemable only in large aggregations; (b) transactions for the shares in the secondary markets to be executed at negotiated prices; (c) permission for affiliated entities of the ETF to deposit into and receive from the ETF securities in connection with purchases and redemptions of the ETFs Creation Units; and (d) permission for investment companies and unit investment trusts to purchase shares above the Section 12(d)(1) limits.

However, there are some differences between the exemptive relief granted to typical ETFs and the relief sought by actively managed ETFs, including:

  • Typical index-based ETF’s generally receive relief from certain prospectus delivery requirements under Section 24(d) of the Investment Company Act, whereas actively managed ETFs have not requested this relief; and
  • Actively managed ETFs agree to be subject to two additional conditions that do not apply to typical index-based ETFs, (1) the ETF’s advisor or subadvisor, directly or indirectly, will not cause any “authorized participant” in the ETF (or any investor on whose behalf an “authorized participant” in the ETF may transact with the ETF) to acquire any security for the ETF through a transaction in which the ETF could not engage directly, and (2) the order will expire on the effective date of any SEC rule under the Investment Company Act of 1940 that provides relief permitting the operation of actively managed ETFs.

The recent actively managed ETF Notices can be found at:
Barclays Global Fund Advisors, et al. (Feb. 6, 2008) http://www.sec.gov/rules/ic/2008/ic-28146.pdf; Bear Stearns Asset Management, Inc., et al. (Feb. 5, 2008) http://www.sec.gov/rules/ic/2008/ic-28143.pdf; Wisdom Tree Trust, et al. (Feb. 6, 2008) http://www.sec.gov/rules/ic/2008/ic-28147.pdf; See also, PowerShares Capital Management LLC, et al. (Feb. 1, 2008) http://www.sec.gov/rules/ic/2008/ic-28140.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.
 

Atkins: Restoration of Predictability to Exemptive Application Process

February 19, 2008 3:22 PM  

Commissioner Paul Atkins discussed in his February 8 speech at the SEC Speaks 2008 the Division of Investment Management’s work to restore predictability in the exemptive application process. Commissioner Atkins stated that he recognizes that “exemptive orders allow for innovation [and that] creating unnecessary obstacles to their processing hinders developments that would expand options available to investors.” Commissioner Atkins acknowledged that some delays in the exemptive application process are the result of cross-divisional lack of communication and that he proposes the creation of a cross-divisional new products czar to coordinate the exemptive process among the SEC divisions.

Commissioner Atkins’ speech can be found at: http://sec.gov/news/speech/2008/spch020808psa.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 Speaks 2008: Chairman Cox Sets SEC Agenda for 2008; Commissioner Atkins Promises to Restore Predictability to Exemptive Application Process

February 19, 2008 2:58 PM  

Cox: SEC Agenda for 2008

On February 8, Chairman Christopher Cox laid out the 2008 agenda for the SEC during his speech at the SEC Speaks 2008. Among other items, Commissioner Cox outlined the following issues on the SEC’s agenda:

  • Creation of the Office of Collections and Distributions. Chairman Cox announced the establishment of the Office of Collections and Distributions, which is tasked with returning disgorged profits that the SEC has collected from “fraudsters and securities law violators to the investors they cheated.” The Office of Collections and Distributions will be headed by Richard D’Anna and Lynn Powalsky and will be up and running by the spring with 34 professional staff members at the SEC’s headquarters in Washington DC.
  • Insider Trading, Securities Fraud and Market Manipulation Initiative. Chairman Cox announced that the SEC would establish a special enforcement working group to combat the problem of insider trading, securities fraud and market manipulation by hedge funds and other large non-public investors. The working group will be headed by Bruce Karpati.
  • Rulemaking Regarding Credit Rating Agencies. Chairman Cox has requested that the staff propose rulemaking that requires “credit rating agencies to make disclosures surrounding past ratings in a format that would improve the comparability of track records and promote competitive assessments of the accuracy of past ratings.”
  • Rulemaking Regarding Point of Sale Disclosures for Mutual Funds. Chairman Cox requested that the Division of Trading and Markets prepare a rule utilizing the latest technology to address disclosure that should be provided to investors at the time they buy mutual funds.
  • Rulemaking Regarding Principal Trading Rules. Chairman Cox requested that the Divisions of Trading and Markets and Investment Management work together to reconcile the two different regulatory regimes governing broker-dealers and investment advisers. The staff will first focus on incorporating comments into the interim final principal trading rule under the Investment Advisers Act of 1940 (the “Advisers Act”) and then on an agency-wide work plan to lay out a definitive roadmap for future rulemaking regarding broker-dealers and investment advisers.
  • Final Rule for Internet Delivery of Mutual Fund Summary Prospectus. Chairman Cox announced that the staff will present to the Commission a final rule for internet delivery of mutual fund summary prospectuses this summer.
  • Overhaul of Rule 12b-1. Chairman Cox announced that the Division of Investment Management, headed by Andrew Donohue, will have a formal rule proposal revising Rule 12b-1 for the Commission to consider by the spring.
  • Protection of Seniors. Chairman Cox said that the protection of seniors from fraud is a priority for 2008 and announced a special initiative involving the SEC, NASAA and FINRA to deal with this issue, (this initiative is discussed separately below).

Chairman Cox’s speech can be found at: http://sec.gov/news/speech/2008/spch020808cc.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.
 

Further Information Regarding the RAND Report

February 11, 2008 8:54 AM  

Cox: SEC Agenda for 2008

On February 8, Chairman Christopher Cox laid out the 2008 agenda for the SEC during his speech at the SEC Speaks 2008. Among other items, Commissioner Cox outlined the following issues on the SEC’s agenda:

  • Creation of the Office of Collections and Distributions. Chairman Cox announced the establishment of the Office of Collections and Distributions, which is tasked with returning disgorged profits that the SEC has collected from “fraudsters and securities law violators to the investors they cheated.” The Office of Collections and Distributions will be headed by Richard D’Anna and Lynn Powalsky and will be up and running by the spring with 34 professional staff members at the SEC’s headquarters in Washington DC.
  • Insider Trading, Securities Fraud and Market Manipulation Initiative. Chairman Cox announced that the SEC would establish a special enforcement working group to combat the problem of insider trading, securities fraud and market manipulation by hedge funds and other large non-public investors. The working group will be headed by Bruce Karpati.
  • Rulemaking Regarding Credit Rating Agencies. Chairman Cox has requested that the staff propose rulemaking that requires “credit rating agencies to make disclosures surrounding past ratings in a format that would improve the comparability of track records and promote competitive assessments of the accuracy of past ratings.”
  • Rulemaking Regarding Point of Sale Disclosures for Mutual Funds. Chairman Cox requested that the Division of Trading and Markets prepare a rule utilizing the latest technology to address disclosure that should be provided to investors at the time they buy mutual funds.
  • Rulemaking Regarding Principal Trading Rules. Chairman Cox requested that the Divisions of Trading and Markets and Investment Management work together to reconcile the two different regulatory regimes governing broker-dealers and investment advisers. The staff will first focus on incorporating comments into the interim final principal trading rule under the Investment Advisers Act of 1940 (the “Advisers Act”) and then on an agency-wide work plan to lay out a definitive roadmap for future rulemaking regarding broker-dealers and investment advisers.
  • Final Rule for Internet Delivery of Mutual Fund Summary Prospectus. Chairman Cox announced that the staff will present to the Commission a final rule for internet delivery of mutual fund summary prospectuses this summer.
  • Overhaul of Rule 12b-1. Chairman Cox announced that the Division of Investment Management, headed by Andrew Donohue, will have a formal rule proposal revising Rule 12b-1 for the Commission to consider by the spring.

    In the January 14, 2008 issue of the WilmerHale Investment Management News Summary, we reported that the SEC had released a pre-publication version of its report on investment advisers and broker-dealers resulting from the study commissioned by the SEC and performed by the RAND Corporation, a non-profit policy group (the “RAND Report”). On February 7, 2008, WilmerHale issued an Email Alert which provides additional information about the RAND Report, “SEC Publishes RAND Report on Investment Advisers and Broker-Dealers.”

    A copy of our Email Alert “SEC Publishes RAND Report on Investment Advisers and Broker-Dealers” can be found at: http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8227.

    A copy of the Rand Report can be found at: http://www.sec.gov/news/press/2008/2008-1_randiabdreport.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.
     

Commissioner Nazareth Leaves the SEC

February 11, 2008 8:51 AM  

SEC Commissioner Annette Nazareth’s resignation from the SEC was effective January 31, 2008. With the departure of Commissioner Nazareth, the SEC is now left with three Republican and no Democratic commissioners. The SEC is not permitted by law to have more than three commissioners from any one political party.

The text of Commissioner Nazareth’s resignation letter to President Bush can be found at: http://blogs.wsj.com/washwire/2008/01/21/and-then-there-were-three/ 

                                             

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 Denies No-Action Relief for Funds’ Omission of Shareholder Ethical Screening Proposal from Proxy Statement  

February 11, 2008 8:50 AM  

On January 22, 2008, the SEC staff denied no-action relief to certain mutual funds that sought relief permitting them to omit from their respective proxy statements a shareholder proposal seeking to force the funds to adopt procedures to screen investments based on ethical criteria (the “Ethical Screening Proposal”).

The funds sought to omit the Ethical Screening Proposal pursuant to Rule 14a-8(i)(7) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which permits funds to omit any proposal that “deal with a matter relating to the [funds’] ordinary business.” The Ethical Screening Proposals, the funds contended, dealt with the funds’ selection of securities, a function that the SEC staff has in the past stated dealt with “the ordinary business operations of an investment company.” The funds also argued that the Ethical Screening Proposal should be deemed to contain false and misleading statements in violation of Rule 14a-9 and, therefore, should be excludable under Rule 14a-8(i)(3).

The SEC staff denied the funds’ request for no-action relief without further explanation.

The SEC staff’s letter denying no-action relief can be found at: http://sec.gov/divisions/investment/noaction/2008/fidelityfunds012208-14a.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 to Overhaul Rules Relating to Mutual Fund Valuation of Holdings, According to Press Reports

February 11, 2008 8:48 AM  

In an interview appearing in an article on Bloomberg.com, Douglas Scheidt, associate director in the SEC’s Division of Investment Management, said that this quarter the SEC will propose the “‘first comprehensive’ revision [of mutual fund valuation rules] in four decades.” According to the article, the SEC is “reacting to an explosion in derivatives and mortgage-backed bonds that don't always trade on exchanges” and the fact that “Funds seem to be relying on stale pricing…[and] were continuing to value the securities at prior levels [even though] facts would suggest that the price would have gone down.” Mr. Scheidt also reported that the proposed rules would establish guidelines for the valuation of assets when reliable trading prices are not available for such assets and for when a mutual fund may rely upon price quotes from independent pricing vendors. The proposed rules would also clarify the responsibilities of fund boards of directors to ensure accurate valuations and require managers to value thinly traded assets at prices for which they can reasonably be expected to sell these assets.

The Bloomberg.com article “SEC to Rework Rules After Funds Struggled With Subprime Prices” can be found at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aceNBDq.uQzc 

 

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 Action Alleging Mispricing of High Yield Bonds in 2000

February 11, 2008 8:42 AM  

An investment adviser and its current and former employees, including its chief executive officer and inside directors (the “Respondents”), consented to the settlement of an SEC enforcement action for allegedly mispricing bonds owned by high-yield municipal bond funds managed by the adviser. (The SEC had earlier settled enforcement actions against independent directors of the funds and the independent pricing vendor for their roles in mispricing the bonds.) The Respondents did not admit or deny the SEC’s findings that the directors had delegated day-to-day pricing responsibility to the adviser, and that the adviser did not properly fair value certain bonds held by the funds once the adviser learned that the projects underlying the bonds were either in default or failing. Instead, the adviser relied upon the valuation of an independent pricing vendor that gradually lowered the value of the bonds in 0.5 percent increments until the valuations were at 80 percent of par value. However, the funds were never able to sell the bonds at these assigned values. The valuations assigned to the bonds were abruptly and severely reduced on two later occasions. Some employees redeemed their fund shares before the final and most severe devaluation.

The SEC found that as a result of the adviser’s failure to properly fair value the bonds the funds’ NAVs were materially overstated and purchases and redemptions were processed at materially incorrect prices. The SEC also found that the board’s review of the adviser’s valuation of the bonds was inadequate because it failed to uncover the deficiencies in the adviser’s pricing of the bonds. The SEC found that such actions resulted in the violations by certain Respondents of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 206(2) of the Advisers Act and Section 34(b) of, and Rule 22c-1(a) under, the Investment Company Act of 1940 (the “Investment Company Act”).

The SEC’s Order, In the Matter of Heartland Advisors, Inc., et al., Release No. 33-8884 (January 25, 2008), can be found at: http://www.sec.gov/litigation/admin/2008/33-8884.pdf  

The SEC’s earlier Orders with respect to the funds, their independent directors and the pricing service can be found at: SEC v. Heartland Group, Inc., Case No. 01 C 1984 (N.D. Ill.), Litigation Release No. 16938 (March 22, 2001) http://www.sec.gov/litigation/litreleases/lr16938.htm, In the Matter of Jon D. Hammes, Albert Gary Shilling, Allan H. Stefl, and Linda F. Stephenson, Administrative Proceeding File No. 3-11351 (December 11, 2003) http://www.sec.gov/litigation/admin/33-8346.htm, and In the Matter of FT Interactive Data, Administrative Proceeding File No. 3-11352 (December 11, 2003) http://www.sec.gov/litigation/admin/ia-2201.htm, respectively.

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

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

Form ADV: Annual Update Reminder

February 11, 2008 8:32 AM  

An investment adviser and its current and former employees, including its chief executive officer and inside directors (the “Respondents”), consented to the settlement of an SEC enforcement action for allegedly mispricing bonds owned by high-yield municipal bond funds managed by the adviser. (The SEC had earlier settled enforcement actions against independent directors of the funds and the independent pricing vendor for their roles in mispricing the bonds.) The Respondents did not admit or deny the SEC’s findings that the directors had delegated day-to-day pricing responsibility to the adviser, and that the adviser did not properly fair value certain bonds held by the funds once the adviser learned that the projects underlying the bonds were either in default or failing. Instead, the adviser relied upon the valuation of an independent pricing vendor that gradually lowered the value of the bonds in 0.5 percent increments until the valuations were at 80 percent of par value. However, the funds were never able to sell the bonds at these assigned values. The valuations assigned to the bonds were abruptly and severely reduced on two later occasions. Some employees redeemed their fund shares before the final and most severe devaluation.

Each investment adviser registered under the Advisers Act is required to update its Form ADV Part 1 (“Part 1”) at least annually. The annual update of Part 1 must be filed electronically with the SEC within 90 days of the investment adviser’s fiscal year-end. In addition, certain Items in Form ADV are required to be updated more frequently (i.e., “amended promptly”) if changes occur. An investment adviser’s Form ADV Part II (“Part II”) is not currently required to be filed with the SEC; however, the information contained in Part II must be updated at the same time as Part I is updated. Although there is not currently a filing requirement for Part II, an investment adviser is required to offer to deliver Part II to each of its advisory clients on an annual basis under Rule 204-3 of the Advisers Act.

A copy of the SEC’s Frequently Asked Questions relating to filing Form ADV can be found at: http://www.sec.gov/divisions/investment/iard/iardfaq.shtml 

The SEC will consider whether to propose long awaited amendments to Part II of Form ADV at its open meeting scheduled for February 13, 2008. The proposed amendments to Part II, if adopted, would require investment advisers to provide clients with narrative brochures containing “plain English” descriptions of the investment advisers’ businesses, services, and conflicts of interest. The proposed amendments also would require investment advisers to file their brochures with the SEC electronically, and the brochures would be available to the public through the SEC’s web site.

A copy of the SEC’s Sunshine Act Meeting Notice for its February 13, 2008 Open Meeting can be found at: http://sec.gov/news/openmeetings/2008/ssamtg021308.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 Discontinues Use of Controversial Document Request Letter

February 11, 2008 8:28 AM  

In a January 23, 2008 letter to the U.S. Chamber of Commerce, SEC Chairman Christopher Cox announced that the SEC examination staff was no longer using its controversial document request letter for examinations of SEC registered investment advisers. Chairman Cox was responding to a letter from the Chamber of Commerce expressing its concern over the breadth of the documents requested by the examination staff letter. Chairman Cox noted that the SEC’s examination staff is developing a new standard document request letter to be used in routine examinations of registered investment advisers that will not request documents unless they are subject to examination under applicable laws and regulations. He further noted that the SEC’s examination staff requires access to certain information required to be maintained by an investment adviser in order to test for compliance with the Investment Advisers Act of 1940 (the “Advisers Act”), and that any records requested by the examination staff would balance the staff’s need for the records against the burden the request may place upon the investment adviser.

A copy of Chairman Cox’s letter to the U.S. Chamber of Commerce is attached hereto.

 
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.
 

Securities Industry and Financial Markets Association (“SIFMA”) Issues White Paper on Best Execution Guidelines for Fixed-Income Securities

February 4, 2008 9:30 AM  
SIFMA recently released a White Paper on best execution guidelines for fixed-income securities (“Guidelines”). SIFMA developed the Guidelines in order to “fill the current void of practical guidance and represent a synthesis of practices at, and experiences of, a number of SIFMA member firms.”

SIFMA defined best execution in the context of fixed-income securities as “an asset manager’s duty to determine and evaluate the circumstances under which the overall value of investment decisions for its clients with respect to those securities will be maximized.” The Guidelines state that essential elements for an asset manager to meet its fixed-income best execution obligation include:
  • identifying the key components of favorable and efficient fixed-income executions;
  • identifying significant factors and information to be considered in selecting fixed-income trading counterparties;
  • determining and documenting trade execution policies and procedures;
  • developing a defined system of controls and risk management regarding fixed-income executions;
  • providing regular supervision and rigorous review of the fixed-income best execution process; and
  • testing and monitoring compliance with policies and procedures.

According to the Guidelines, fixed-income managers should consider the following issues when developing or evaluating their best execution policies and procedures:

Guideline 1 – Policy and Procedures: A firm should develop best execution policies and procedures tailored to its operations and the types of fixed-income securities in which it trades.

Guideline 2 – Establishment of a Best Execution Committee or Similar Structure: A best execution committee, or similar structure, may help in establishing and evaluating periodically the process a firm will follow.

Guideline 3 – Review of Quantitative and Qualitative Information: A firm should evaluate and determine, in light of its access to reliable market data for the types of fixed-income securities in which it will primarily invest on behalf of clients, the extent to which its best execution policy should include pre-trade evaluation of data and execution decisions, and/or post-trade analysis of transactions.

Guideline 4 – Counterparty Selection: A firm should identify specific quantitative and qualitative criteria for selecting counterparties, and such counterparties should be evaluated periodically against these criteria.

Guideline 5 – Utilizing Technology: A firm should consider and incorporate available technological resources when developing a best execution process.

Guideline 6 – Dealing with Conflicts of Interest: Regardless of whether a firm’s emphasis is pre- or post-trade, the firm’s policies and procedures and internal monitoring systems need to address potential conflicts of interest that could impair the firm’s ability to obtain best execution.

Guideline 7 – Transaction Reports: Transaction reports, particularly when viewed on an aggregate basis and over time, can provide a valuable tool when gauging and evaluating the success of a firm’s best execution efforts.

Guideline 8 – Use of Market Data to Evaluate Best Execution: When readily available, post-trade market data can help to ensure an effective best execution process. Post-trade information may, however, have limitations, particularly with respect to fixed-income securities traded in less transparent markets, and firms should evaluate carefully the usefulness of such data when developing their best execution process.

SIFMA’s White Paper is available at: http://www.sifma.org/asset_management/docs/SIFMA-AMG-Best-Execution-White-Paper-Jan2008.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.
 

New Hedge Fund Standards Board Will Promote Best Practices Among U.K. Hedge Funds

February 4, 2008 9:01 AM  
A U.K. hedge fund industry organization, the Hedge Fund Standards Board (the “Board”), established to increase transparency to investors in an effort to head off the threat of greater regulation, recently released a set of guidelines titled Hedge Fund Standards: Final Report which aim to establish voluntary standards for hedge fund managers.

The report lists specific recommendations relating to hedge fund operations:
  • Disclosure: Managers should be transparent about fees, investment risks and dealings with lenders and prime brokers.
  • Valuation: Fund valuation should be performed by an independent and competent outside body. If that is not possible, the guidelines have been drafted to ensure that in-house valuation is conducted by a department segregated from portfolio management.
  • Risk management: Funds should provide investors with more frequent portfolio risk disclosure, at least on a quarterly basis. The guidelines require legal and regulatory risk to be addressed with respect to breakdowns of internal controls or systems which can lead to financial losses.
  • Fund governance: Governance arrangements should be put in place which are capable of dealing with conflicts between managers and investors.
  • Shareholder conduct including activism: The standards require managers: (i) not to borrow stock in order to vote, and (ii) to have a proxy voting policy which allows investors to evaluate how managers will likely vote shares.

Managers who voluntarily sign up to meet these standards must comply with or explain why they cannot meet such guidelines. Such standards will be overseen by the Board, yet there will be no enforcement actions taken against signatories that do not meet the proscribed standards. The Financial Services Authority, the U.K.’s securities regulatory authority, has stated that it will not monitor compliance of hedge funds to the standards delineated in the report.

The Hedge Fund Standards: Final Report can be downloaded at: http://www.pellin.co.uk/HFWG/HFWG-FINAL-REPORT.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.
 

Investment Company Institute (“ICI”) Supportive of Proposed Rule Changes Relating to Fund Sales Materials Approvals

February 4, 2008 9:00 AM  

On January 18, 2008, the ICI submitted a comment letter to the SEC supporting the proposed change to NASD Rule 2210 that would modify the requirement for approval of investment company sales material by principals at securities firms selling fund shares.

On December 20, 2007, the SEC issued a notice of a proposal by the Financial Industry Regulatory Authority (“FINRA”) to amend NASD Rule 2210 to create an exemption from the requirements for approving certain filed sales materials distributed to prospective investors. Under the current rule, sales material for mutual funds and variable insurance products must go through a multilayered review process. This involves having a registered principal at the fund’s or variable product’s underwriter first approve the sales material internally and then filing it with FINRA for inspection. The FINRA proposal would relieve an intermediary’s registered principal from having to review and approve sales material already submitted by a fund underwriter and approved by FINRA’s Advertising Regulation Department.

The ICI comment letter noted that the proposed rule change could generate savings for intermediaries and the ability for fund shops to see their products reach the market in a more timely fashion.

The letter from Dorothy M. Donohue, Senior Associate Counsel, of the ICI to the SEC can be found at: http://www.ici.org/statements/cmltr/08_finra_sales_com.html#TopOfPage  

                                             
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 Finds Investment Adviser in Violation of Antifraud Provisions and Reporting and Registration Requirements Under the Investment Advisers Act of 1940 (the “Advisers Act”)

February 4, 2008 8:57 AM  
On January 16, 2008, the SEC issued its opinion in an appeal from an administrative proceeding finding that an investment adviser and its president reported false information about the investment adviser’s assets under management in Forms ADV filed with the SEC and inflated performance results provided to database services that published the information.

On appeal, the SEC concurred with the Division of Enforcement’s allegations and found that:
  • The investment adviser and the president inflated the investment adviser’s assets under management, did not have $25 million in assets under management to justify registration with the SEC, and therefore violated Section 203A of the Advisers Act.
  • The investment adviser and the president falsified Forms ADV filed with the SEC from 1997 to 2000 that stated that the investment adviser had assets under management in excess of $25 million. As such, the SEC found that the respondents violated Section 207 of the Advisers Act, which makes it unlawful for any person to willfully make an untrue statement of material fact or to omit to state a material fact required to be stated in applications or reports to the SEC.
  • The investment adviser and the president breached their fiduciary duties to exercise good faith in dealing with clients and prospective clients and to employ reasonable care to avoid misleading them. The SEC held that the respondents’ statements provided to database services were false and misleading because they greatly overstated the investment adviser’s assets under management, by an average of $29 million per year. In addition, the investment adviser’s average annual performance was found to have been exaggerated to more than double of actual performance. As such, the SEC found that the investment adviser and the president had violated Advisers Act Sections 206(1), 206(2) and 206(4)1

The SEC ordered that the president of the adviser be barred from any future association with any investment adviser.

The SEC’s opinion in this proceeding can be read at: http://www.sec.gov/litigation/opinions/2008/ia-2694.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.