Investment Management Industry News Summary - Feburary 2007

Investment Management Industry News Summary - Feburary 2007

Publications

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

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

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Investment Company Institute (“ICI”) Issues Policy Statement On Retirement Plan Disclosure

February 16, 2007 10:06 AM

On January 30, 2007, the ICI’s Board of Governors adopted a policy statement on retirement plan disclosure that calls for the Department of Labor (“DOL”) to require clear fee disclosures to both plan sponsors and retirement plan participants. The policy statement makes the following recommendations.

  • With respect to plan sponsors, the required disclosure should focus on the total fees paid to service providers and the allocation of expenses between a sponsor and plan participants.
  • Disclosure should also include arrangements where a service provider receives some share of its revenue from a third party.
  • Plan sponsors should identify the services provided for the fees charged, list all expenses, and make meaningful comparisons among the different products and services that are available.

The ICI policy calls for retirement plan participants to receive straightforward explanations about each of the investment options available to them, including information on fees and expenses. The ICI recommends that the DOL expand current disclosure requirements to require plan administrators to provide a concise summary of the following five items for each investment option:

  • investment objectives,
  • principal risks,
  • annual fees (expressed in a ratio or fee table),
  • historical performance, and
  • information on the investment adviser managing the product’s investments.
 
 



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.

Financial Services Commission Prepares Securities and Investment Business Act

February 16, 2007 9:59 AM

The Financial Services Commission of the British Virgin Islands is preparing legislation, known as the Securities and Investment Business Act, to tighten regulations on the approximately 2,600 existing hedge funds, most of which are operated by managers based in the United States. Hedge fund managers domicile and register their funds in the British Virgin Islands to allow non-U.S. investors to avoid paying U.S. taxes on their non-U.S. investments. The proposed legislation, if enacted, would likely require the following:

  • funds to produce annual audited accounts;
  • funds to have two directors, independent of each other, to increase transparency and accountability; and
  • funds to have an “authorized representative” who would act as a whistleblower if funds breached the terms of their private placement memorandum or if improper asset valuation and/or trading were detected.

The Financial Times Limited, “Boost for Offshore Regulation,” February 12, 2007.

 
 



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 Commences Examination of Brokerages

February 16, 2007 9:53 AM

According to recent remarks by Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, the SEC staff has commenced an examination of brokerage firms to determine whether brokerage employees are revealing information regarding sizeable trades to hedge funds and other clients. In comments to The Bureau of National Affairs on February 7, 2007, Ms. Richards noted that the fact-finding examinations are being conducted initially without a focus on specific firms or specific trades. Traders for mutual funds, hedge funds and other institutional asset managers have expressed concern that some brokerage firms may be revealing information that is enabling other market participants to trade ahead of their trades, a practice known as front-running. Ms. Richards confirmed that letters had been sent to at least ten major Wall Street brokerage firms, requesting large amounts of trading data.

The Bureau of National Affairs, Inc., “SEC Staff Starts Exams of Broker Firms to Check Possible Favors for Big Clients,” February 8, 2007.

 
 



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 Use of “Hedge Clauses” in Investment Advisory Contracts

February 16, 2007 9:36 AM

In a recent no-action letter, the staff of the SEC’s Division of Investment Management addressed the use of certain client indemnification provisions known as “hedge clauses” in investment advisory agreements and whether such clauses implicate the antifraud provisions of Section 206(1) and Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”).

Section 206 (1) and 206(2) of the Advisers Act make it unlawful for any investment adviser to employ any device, scheme, or artifice to defraud, or to engage in any transaction, practice or course of business which operates as a fraud or deceit upon any clients or prospective clients. These antifraud provisions may be violated by the use of a hedge clause or other exculpatory clause that makes a client believe that non-waivable rights of action provided by federal or state law have been waived, even if other provisions explicitly state that client rights cannot be relinquished.

The request for no-action relief was submitted on behalf of an investment management firm (the “Manager”) that provides investment advisory services predominantly to (i) institutional investors (i.e., state and municipal government entities, corporate pension funds, endowments, foundations, employee retirement systems, universities and high net worth individuals/family entities), (ii) private equity investment funds whose owners consist primarily of institutional investors, (iii) wrap accounts through a subadvisory relationship with the broker-dealer sponsor of the wrap programs, and (iv) registered investment companies through a subadvisory relationship. With respect to the Manager’s separate account and private fund clients, the Manager has historically entered into investment advisory contracts with a “gross negligence” standard of care. The Manager was the subject of a routine SEC staff inspection and received a comment letter requiring the Manager to strike the “gross negligence” language from an investment advisory agreement with one of its pension fund clients. As a result, the Manager sought assurance that the SEC staff would not seek enforcement action if the Manager were to include language such as that set forth below in its advisory agreements with certain categories of institutional and otherwise sophisticated clients.

The proposed client indemnification provision and an accompanying provision that states that clients may have legal rights against the Manager regardless of the hedge clause (the “non-waiver disclosure”) are as follows:

  • Client Indemnification: Client shall indemnify and hold harmless Manager and its affiliates and their respective directors, managers, officers, agents and employees, from and against any and all losses, claims, demands, actions, or liability of any nature, including but not limited to attorneys’ fees, expenses and court costs, arising out of or in connection with this Agreement, except to the extent based upon, arising out of or in connection with Manager’s grossly negligent, reckless, willfully improper or illegal conduct in its performance or failure to perform under this Agreement, actions outside the scope of Manager’s authority or other material breach under this Agreement, by Manager, its directors, managers, officers, employees and agents.
  • Non-Waiver of Rights: Notwithstanding the foregoing, nothing contained in this paragraph or elsewhere in this Agreement shall constitute a waiver by Client of any of its legal rights under applicable U.S. federal securities laws or any other laws whose applicability is not permitted to be contractually waived.

The SEC staff stated that whether an investment adviser that uses “hedge clauses” in investment advisory agreements that seek to limit that adviser’s liability to acts of gross negligence or willful malfeasance violates sections 206(1) and 206(2) of the Advisers Act would depend on all of the surrounding facts and circumstances. In making this determination, the SEC staff indicated that it would consider the form and content of the particular hedge clause (e.g., its accuracy), any oral or written communications between the investment adviser and the client about the hedge clause, and the particular circumstances of the client. For instance, when a hedge clause is in an investment advisory agreement with a client who is unsophisticated in the law, the staff would consider factors including, but not limited to, whether:

  • the hedge clause was written in plain English;
  • the hedge clause was individually highlighted and explained during an in-person meeting with the client; and
  • enhanced disclosure was provided to explain the instances in which such client may still have a right of action.

In addition, the SEC staff would consider the presence and sophistication of any intermediary assisting a client in his or her dealings with the investment adviser and the nature and extent of the intermediary’s assistance to the client. The SEC staff also noted that an investment adviser has an affirmative duty to explain a hedge clause “if the investment adviser believes or has reason to believe that a particular client, in light of his or her unique circumstances, would be likely to be misled by it.”

Accordingly, the SEC staff concluded that the Manager’s use of hedge clause and non-waiver disclosure, of the type described above, would not per se violate sections 206(1) and 206(2) of the Advisers Act. However, the SEC staff took no position regarding whether the use of any specific hedge clause and non-waiver disclosure would mislead any particular client because of the fact-intensive nature of the inquiry that would be necessary regarding the relationship and communications between the Manager and each individual client (and any intermediary), the form and content of the particular hedge clause, and the client’s particular circumstances.

The SEC staff further noted that as a matter of policy, the staff will not provide no-action or interpretive assurances under sections 206(1) or (2) of the Advisers Act regarding an investment adviser’s use of any particular hedge clause with its clients.

SEC No-Action Letter, Heitman Capital Management, LLC (February 12, 2007), available at: http://www.sec.gov/divisions/investment/noaction/2007/heitman021207.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.

CFTC Amends Rules to Require Electronic Filing of Notices under Part 4 of its Regulations

February 9, 2007 10:36 AM

The CFTC has amended its regulations to require that notices of exemption or exclusion under Rule 4.5, Rule 4.7, Rule 4.12(b), Rule 4.13, and Rule 4.14(8) be filed electronically with the National Futures Association (“NFA”) effective as of February 15, 2007. These amendments eliminate the requirement of filing notices with the NFA in paper form.

In order to file notices electronically, both CFTC registrants and non-registrants will have to access the NFA’s electronic filing system through the use of a designated user ID and password. CFTC registrants will establish access for appropriate staff by using their existing Online Registration System (“ORS”) accounts. For non-registrants, which are otherwise not required to have ORS account, the NFA has established a new process that contains similar safeguards regarding the identity of filers and provides the ability to establish one or more system users. For both registrants and non-registrants, the person who submits a notice on behalf of the filer must be a duly authorized representative of the filer.

The electronic filing system will allow filers to select a particular exemption type and complete a form that contains the information required for that type of exemption filing. Each form will contain a representative’s statement that information contained therein is accurate and complete, to the best of his or her knowledge, and that the representative is duly authorized to bind the filer.

The CFTC has also adopted technical amendments that remove the requirement for filing copies of notices under Part 4 of its regulations with the CFTC and has revised other sections of Part 4 to refer to filings with the NFA rather than the CFTC.

CFTC Federal Register Notices, 72 FR 1658 (January 16, 2007)

 
 



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 Expands Interactive Data Voluntary Reporting Program to Include Mutual Fund Information

February 9, 2007 10:33 AM

The SEC recently published for comment rule amendments that, if adopted, will expand the current interactive data voluntary reporting program to allow mutual funds to submit risk/return summary information from their prospectuses. The risk/return summary includes information about a fund’s investment objectives and strategies, risks, costs, and historical performance.

Data tagging uses standard definitions or data tags to translate text-based information into data that is interactive, which can be retrieved, searched, and analyzed through automated means. Tagged information can assist investors, analysts, and other users to mine the abundant information contained in detailed paper disclosure documents to access precisely the information that they are attempting to locate. Interactive data, by automating information processing, may provide improved quality of information at decreased cost.

The SEC adopted rules in 2005 that instituted a program that permits filers, on a voluntary basis, to submit specified, supplemental disclosure tagged in eXtensible Business Reporting Language (“XBRL”) format as exhibits to certain filings on the SEC’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). In 2006, the SEC initiated an interactive data test program where companies, including mutual funds, voluntarily furnished financial data in XBRL format.

Mutual funds may currently submit XBRL exhibits only to Form N-CSR (the semi-annual certified shareholder reports) or Form N-Q (the quarterly report of portfolio holdings). The proposed rule amendments would allow mutual funds to submit risk/return summary sections in prospectuses as tagged information using a taxonomy being developed by the Investment Company Institute. Any mutual fund submitting tagged risk/return summary information would be required to include this information as an amendment to a previous Form N-1A (the registration form for mutual funds) filing. The proposed amendments would not allow the submission of tagged exhibits for registration statements or amendments that are not yet effective. The tagged exhibits submitted in the voluntary program are supplemental submissions that do not replace the required official versions of the information in either the American Standard Code for Information Interchange (“ASCII”) or Hypertext Markup Language (“HTML”) formats.

SEC Release Nos. 33-8781; IC-27697; File No. S7-05-07 (February 6, 2007), available at: http://www.sec.gov/rules/proposed/2007/33-8781.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 Staff Issues No-Action Letter Regarding Rule 22c-2 and Information Provided by Certain Foreign Financial Intermediaries

February 9, 2007 10:27 AM

The staff of the SEC’s Division of Investment Management recently granted no-action assurance to a registered investment company (“fund”) that enters into agreements with certain foreign financial intermediaries to supply transaction information linked to identification numbers generated by the financial intermediary rather than government issued identification numbers (“GII”), as required under Rule 22c-2 under the Investment Company Act of 1940 (the “1940 Act”) for shareholder accounts established before January 1, 2008.

Rule 22c-2 requires that funds enter into agreements with financial intermediaries purchasing shares in nominee accounts requiring the intermediaries to supply information on the identity and transactions of shareholders who hold fund shares through the intermediaries. The rule is intended to enhance the transparency of shareholder accounts held in nominee name and to allow funds to monitor trading activity that is unlawful or detrimental to long-term shareholders. Under Rule 22c-2, by April 16, 2007, funds and intermediaries must enter into such shareholder information agreements that require intermediaries to provide information, upon a fund’s request, linked to a taxpayer’s identification number, individual taxpayer identification number, or other GII.

Because certain foreign laws prohibit foreign intermediaries from providing a customer’s GII without the customer’s affirmative consent, which would not be feasible for most foreign intermediaries. The SEC staff granted relief to permit foreign intermediaries to provide shareholder identity information through a unique identification number generated by the intermediary, rather than a GII, for accounts established prior to January 1, 2008.

The SEC staff reached this position based on the following representations:

  • Unique identification numbers generated by a financial intermediary would only be allowed where foreign laws prohibit the sharing of a shareholder’s GII without the affirmative prior consent of the shareholder;
  • The financial intermediary that generates a unique identification number will use the same unique number to identify all accounts held by that ultimate beneficial owner or owners;
  • GIIs will be used for shareholder accounts established with such foreign intermediaries after January 1, 2008; and
  • Upon the request from a fund, the financial intermediary agrees to restrict or prohibit a shareholder with a particular GII or unique identification number from further purchases of the fund’s shares.

SEC No-Action Letter, Investment Company Institute and Institute of International Bankers (February 1, 2007), available at: http://www.sec.gov/divisions/investment/noaction/2007/ici020107-sec22c.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.

Massachusetts Regulators Charge Hedge Fund and its Principals with Private Placement Violations for Web Access

February 9, 2007 10:12 AM

On January 31, 2007, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against certain investment funds and related management entities and their principals (the “Respondents”), for failure to ensure that the offer or sale of their securities in Massachusetts were properly registered or exempted in accordance with Section 301 of the Massachusetts Uniform Securities Act (the “Act”).

The complaint alleges that the Respondents operate a hedge fund business that maintains an interactive website through which prospective investors have unrestricted access to general advertising and offering materials to certain hedge funds. The complaint states that prospective investors can access the advertising and offering materials by merely acknowledging that he or she has read a disclaimer that the materials do not constitute a solicitation or offer. The complaint further notes that the Respondents fail to follow the usual manner of private offerings conducted over the internet consisting of password protected websites accessed by prospective investors whom the issuer has pre-screened as properly accredited and/or sophisticated. In addition, the complaint states that the Respondents’ website has no meaningful restrictions on access based upon a prospective investor’s state of residence, investment sophistication, or financial background and that therefore, the Respondents are engaged in an unregistered, non-exempt, public offering of securities in Massachusetts.

Specific allegations in the complaint include the following:

  • Respondents’ website permits Massachusetts residents access to a printable offering brochure with information about investment opportunities, investment strategies, annual returns, and background information on the managers without pre-qualifying prospective investors as either financially accredited or sophisticated in financial matters;
  • At least one Massachusetts resident, who identified his state of residence as such, was sent advertising and offering materials via email without providing any financial, educational, or investment experience information; and
  • One of the attachments to the email was a presentation that included performance data and advertisements of the success of recent investments by the Respondents.

The Massachusetts Securities Division seeks an order instructing Respondents to cease and desist from any further violations of the Act, to pay an administrative fine, and to take any and all actions necessary to ensure that the offer or sale of securities in Massachusetts are in accordance with Section 301 of the Act.

In the Matter of Bulldog Investors General Partnership, Docket No. E-07-0002 (January 31, 2007), available at: http://www.sec.state.ma.us/sct/sctbulldog/bulldogidx.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.

Interagency Statement Outlines Sound Practices for the Elevated Risk of Complex Structured Finance Activities

February 2, 2007 10:58 AM

On January 5, 2007, five federal agencies, including the SEC, issued a final interagency statement on complex structured finance transactions (“CSFTs”) that is effective on January 11, 2007. The statement outlines the internal controls and risk management procedures that should assist financial institutions identify, manage, and address the full range of risks associated with CSFT activities, including the heightened reputational and legal risks that may arise from certain CSFTs.

The final statement is substantially similar to the revised statement issued for comment in May 2006, but has been modified to reflect certain comments received by the agencies. Because CSFTs are typically conducted by a limited number of large financial institutions, the final statement will not affect or apply to the vast majority of financial institutions, including most small institutions.

SEC Release No. 55043; File No. S7-08-06 (January 5, 2007), available at: http://www.sec.gov/rules/policy/2007/34-55043.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.

Financial Services Authority Publishes Guidance for Secondary Listings in London for Non-UK Companies

February 2, 2007 10:55 AM

In December 2006, the United Kingdom’s financial services regulator, the Financial Services Authority (“FSA”) published Consultation Paper (“CP”) 06/21, comments on which are due by February 28, 2007. CP 06/21 follows CP 06/04, which included a discussion of the listing requirements for “Investment Entities.”

The FSA is the UK’s Listing Authority. This means that it administers the criteria for admission to listing and for continuing admission to listing. Currently, those criteria include certain restrictions that have made the UK an unattractive venue for funds to list, chiefly the restrictions that prohibit investment companies from owning controlling stakes in the assets in which they invest and that impose concentration limits. These restrictions are applied by Chapter 15 of the FSA’s Listing Rules.

The FSA’s December 2006 proposal withdraws its earlier proposal to prohibit investment entities from listing under the less onerous listing regime set out in Chapter 14 of the Listing Rules. Chapter 14 deals with entities obtaining a secondary listing in the UK, without being subject to the requirements and restrictions of Chapter 15. This proposal would have the significant result of allowing an overseas company to obtain a secondary UK listing without being subject to control and concentration restrictions. Essentially, the secondary listing could be an overseas company's only listing; that is, the company would not be required to obtain a primary listing elsewhere.

Financial Services Authority Consultation Paper 06/21, “Investment Entities Listing Review: Further Consultation and Feedback on Part 2 of CP 06/4,” dated December 2006. Available at: http://www.fsa.gov.uk/pubs/cp/cp06_21.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 Staff Cites Weaknesses in Annual Compliance Reviews of Advisers and Mutual Fund Groups

February 2, 2007 10:48 AM
At an investment adviser regulation conference sponsored by the American Law Institute-American Bar Association in Washington on January 26, 2007, Gene Gohlke, associate director in the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), stated that summary statistics based on the SEC’s examinations of 158 investment advisers and 24 mutual fund groups indicated that in 40% of the examinations, the SEC was not assured that the compliance program was effective.

Mr. Gohlke stated that weaknesses included, among other things, annual compliance reviews conducted solely by the chief compliance officer without input from business personnel and compliance reviews not conducted throughout the year but in some instances in a single day. Mr. Gohlke also emphasized the need for an ongoing evaluation of an adviser’s compliance program during the year, even though Rule 206(4)-7(b) under the Investment Advisers Act of 1940 requires an “annual” evaluation.

Noting that the rule does not provide much guidance as to the particular requirements of the annual review, he listed the following items that the OCIE staff inquire about in its examinations of an adviser’s annual compliance review:

    • Who conducted the review? For example, was it the chief compliance officer, other compliance personnel, business people, or a third party consultant?
    • What was reviewed?
    • Did the review cover processes, such as the process by which policies and procedures are implemented?
    • When did the review occur?
    • How was the review conducted? For example, did the firm look back at compliance breaches over the course of the year? Did the firm ask personnel to do self-assessments?
    • What findings came from the review?
    • What recommendations were made to the firm or management based on the review?
    • What is the status of the implementation of those recommendations?
    • Where is the documentation for all of the above?



“SEC Exams of Advisers, Fund Groups Find Weaknesses in Annual Compliance Reviews,” BNA Securities Law Daily, January 29, 2007.
 
 



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 No-Action Letter Exempts Service Providers Offering Independent Research from Registering as Broker-Dealers

February 2, 2007 10:43 AM
The staff of the SEC’s Division of Market Regulation recently issued a no-action letter to a broker-dealer enabling certain service providers participating in a research program established by the broker-dealer (the “Program”) to receive compensation for “research services” without registering as broker-dealers under the Securities Exchange Act of 1934 (the “Exchange Act). Under the Program, money managers accumulate a “pool” of client commissions from transactions executed through the broker-dealer and periodically direct the broker-dealer to pay specified dollar amounts from that pool to various service providers for the provision of “research services” under the safe harbor provided by Section 28(e) of the Exchange Act.

At issue was whether the service providers participating in the Program are receiving transaction-based compensation, which might require these service providers to be registered as broker-dealers pursuant to Section 15(b) of the Exchange Act. The terms “broker” and “dealer” are defined, in relevant part, in the Exchange Act as any person “engaged in the business” of transacting securities. The receipt of transaction-based compensation is considered a key factor in determining whether a person is engaged in this business. Although the service providers of research are paid periodically from a pool of accumulated client commissions, the SEC staff concluded that these soft dollar payments do not constitute transaction-based compensation that requires broker-dealer registration.

In reaching this conclusion, the SEC staff noted the following conditions:

    • The money managers are responsible for independently determining the value of the research services;
       
    • The broker-dealer is not involved in determining the value of the research services to the money managers;
    • The service providers receive payment for research services from a pool of commissions set aside for such purpose;
    • Payment to a service provider is not conditioned on any particular transaction; and
    • The service providers do not perform other functions that are typically characteristic of broker-dealer activity.

SEC No-Action Letter, Goldman, Sachs & Co. (January 17, 2007), available at: http://www.sec.gov/divisions/marketreg/mr-noaction/2007/goldmansachs011707-15a.pdf.
 
 



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

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

SEC Adopts Final Rules and Additional Proposed Rules Regarding Internet Availability of Proxy Materials

February 2, 2007 10:39 AM

On January 22, 2007, the SEC adopted amendments to the proxy rules under the Securities Exchange Act of 1934 that allow issuers and other soliciting persons to provide notice and access to proxy materials by posting them on a publicly-available internet website (other than the SEC’s EDGAR website) and by providing shareholders a Notice of Internet Availability of Proxy Materials (“Notice”) and an explanation of how to access those materials.

Under the SEC’s “notice and access” model, issuers must send a Notice to shareholders 40 calendar days or more in advance of a shareholder meeting date, of if no meeting is to be held, at least 40 calendar days in advance of the date that consents or authorizations may be used to effect a corporate action. At the time that the Notice is sent, shareholders must have a means to execute the proxy. The Notice must also explain the process for requesting a copy of the proxy materials at no charge to the shareholder and how a shareholder may indicate a future preference for receiving an electronic or paper copy of proxy materials. No other materials may accompany the Notice except for a notice of a shareholder meeting required under any applicable state law. Under the new rules, an issuer may send shareholders a proxy card 10 calendar days or more after sending the Notice, allowing shareholders sufficient time to access the proxy materials.

Other soliciting persons may also rely on the new notice and access model in substantially the same manner as issuers. As with issuers, other soliciting persons’ election to use the notice and access model will be voluntary. However, unlike an issuer, a soliciting person may selectively choose the shareholders from whom it solicits proxies. A different timeframe also applies for soliciting persons, who may send out a Notice by the later of (1) 40 calendar days prior to the meeting or (2) 10 calendar days after the issuer first distributes its proxy statement or Notice to shareholders.

Issuers and other soliciting persons may require, by request, that brokers, banks and other intermediaries use the notice and access model. Once the intermediary receives such a request, the intermediary must prepare its own Notice for distribution to beneficial owners and must allow beneficial owners to elect to receive either paper or electronic copies of proxy materials. The intermediary’s Notice should direct beneficial owners to request paper or electronic copies from the intermediary rather than from the issuer.

The final rules are intended to have two significant benefits. First, issuers may significantly lower the costs of their proxy solicitations, which ultimately are borne by shareholders. Second, other soliciting persons may reduce their costs of engaging in a proxy contest.

These amendments to the proxy rules do not apply to business combination transactions. In addition, the availability of the notice and access model currently does not affect the availability of any other existing methods of providing proxy materials.

The effective date of these final rules is March 30, 2007. However, a Notice under these amendments may not be distributed prior to July 1, 2007.

SEC Release Nos. 34-55146; IC-27671; File No. S7-10-05 (January 22, 2007), available at: http://www.sec.gov/rules/final/2007/34-55146.pdf.

In a companion release, the SEC also proposed additional amendments to the proxy rules that would require issuers and other soliciting persons to furnish proxy materials to shareholders by posting them on a website and provide shareholders notice of the availability of these proxy materials. As with the final rules, shareholders could, however, opt out by electing to receive either paper or electronic copies of the materials. These proposed amendments are intended to allow shareholders a choice of the form in which they receive proxy materials. The SEC is considering making the proposed mandatory internet availability of proxy materials effective for large accelerated filers, except registered investment companies, on January 1, 2008 and for all other issuers, including registered investment companies, on January 1, 2009. Comments on the proposed amendments are due on or before March 30, 2007.

SEC Release Nos. 34-55147; IC-27672; File No. S7-03-07 (January 22, 2007), available at: http://www.sec.gov/rules/proposed/2007/34-55147.pdf.


 
 



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