This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.
IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
NASD Releases Guidance on Outsourcing July 29, 2005 1:19 PM In July 2005, the NASD published a notice to members outlining members’ responsibilities when contracting with third-party service providers to perform certain activities and functions related to their business operations and regulatory responsibilities. The notice explains that parties conducting activities or functions that require registration under NASD rules will be considered associated persons of the member, absent the service provider separately being registered as a broker-dealer and such arrangements being contemplated by NASD rules (such as in the case of clearing arrangements), MSRB rules, or applicable federal securities laws or regulations. In addition, the NASD underscored that outsourcing to a third party does not relieve members of the responsibility for compliance with all applicable laws and regulations regarding the outsourced activity or function. NASD urged its members to exercise sufficient oversight to ensure that qualified individuals monitor any outsourcing arrangement, including the performance of adequate due diligence of the service provider. 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 Institutes Administrative Proceedings Against Former Officers of Mutual Fund Underwriter and Adviser July 29, 2005 1:15 PM The SEC settled separate proceedings against the former president, CEO and director of a mutual fund family’s underwriter, and against the chief investment officer of the fund family’s adviser in connection with their roles in authorizing or permitting market timing agreements within certain portfolios of the mutual fund complex over which they exercised authority. The SEC alleged that, despite the funds’ disclosed prohibitions against market timing, the two officers had knowledge of, and played a role in approving agreements with, market timers who traded in the funds. The SEC found that the officers violated Section 206(2) of the Investment Advisers Act, Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, and Section 34(b) of the Investment Company Act. Each officer was ordered to cease and desist from committing or causing any violation or future violations of these provisions and ordered to pay a civil penalty. The former president, CEO and director of the underwriter was suspended from association with any broker or dealer and prohibited from serving a registered investment company for nine months. The CIO was suspended from association with any adviser and prohibited from serving any registered investment company for six months. In the Matter of Michael J. Cemo, Securities Exchange Act Release No. 52055 (July 18, 2005); In the Matter of Edgar M. Larsen, Investment Advisers Act Release No. 2406 (July 18, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC Settles Market Timing and Late Trading Case July 29, 2005 1:12 PM The SEC settled an administrative proceeding against a broker-dealer and its financing subsidiaries for their role in facilitating deceptive market timing and late trading of mutual funds by certain customers. The Commission ordered the respondents to pay $125 million, consisting of $100 million in disgorgement and $25 million in penalties. The SEC alleged that the respondents arranged and provided financing for certain hedge fund customers while knowing that the customers would use the leverage to late trade and deceptively market time mutual funds as part of a scheme to defraud mutual funds and their long-term shareholders. The SEC also alleged that the financing involved loans secured by mutual fund shares extended in amounts that violated margin and extension of credit requirements promulgated by the Federal Reserve. Finally, the SEC also alleged that a team of registered representatives of the broker-dealer helped customers engage in late trading and market timing of mutual fund shares by using multiple accounts, multiple rep numbers, and small trades broken up across related accounts in order to evade the mutual funds’ efforts to prevent such trading. As a result, the SEC found that the financing subsidiaries violated Section 17(a) of the Securities Act of 1933, Sections 7(d) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Regulation U. The SEC found that the financing subsidiaries aided and abetted and caused violations of Rule 22c-1 under the Investment Company Act. The SEC also found that the broker-dealer violated Section 17(a) of the Securities Act, Sections 7(c), 10(b), 11(d), 15(c) and 17(a) of the Exchange Act and Rules 10b-3, 10b-5, and 17a-3 thereunder, Rule 22c-1 under the Investment Company Act of 1940, and Regulation T. In the Matter of Canadian Imperial Holdings Inc. and CIBC World Markets Corp., Securities Act Release No. 8592 (July 20, 2005); In the Matter of Canadian Imperial Holdings Inc. and CIBC World Markets Corp., Securities Act Release. No. 8593 (July 20, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC Amends EDGAR Rules Concerning Mutual Fund and Separate Account Filings July 29, 2005 1:03 PM On July 21, 2005, the SEC published a final rule expanding the information that certain open-end management investment companies and insurance company separate accounts must identify in their EDGAR system filings. Specifically, filers must now supply information indicating to which series and classes (for specified investment companies) or contracts (for separate accounts) the filing relates. Under the amended rules, investment companies now will have to begin filing sales literature filed under Section 24(b) of the Investment Company Act of 1940 and fidelity bonds filed under Section 17 of the Act electronically. Another category of documents, litigation materials filed under Section 33 off the Investment Company Act, may still be filed either in paper or electronically. The rulemaking also included several minor and technical amendments to rules related to the electronic submission of filings through EDGAR. According to the release, these amendments are intended to keep EDGAR current technologically and to make it more useful to the investing public and Commission staff. SEC Release Nos. 33-8590; 34-52052; 35-28002; 39-2437; IC-26990 File No. S7-16-04. 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 Motion to Stay Governance Rule July 29, 2005 1:01 PM On July 15, 2005, the SEC denied a motion by the U.S. Chamber of Commerce to stay the agency’s mutual fund governance rule pending the resolution of the Chamber’s suit challenging the regulation in the U.S. Court of Appeals for the District of Columbia Circuit. The motion was denied by a 2-2 vote. BNA Reports, Securities Law Daily (July 19, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
Senate Banking Committee Approves Commission Nominees July 29, 2005 12:55 PM After holding hearings on July 26 regarding the nomination of Rep. Christopher Cox (R-CA) to serve as Chairman, and Division of Market Regulation Director Annette Nazareth and Commissioner Roel Campos to serve as Commissioners of the Securities and Exchange Commission (“SEC”), the Senate Banking Committee has approved the nominations. The full Senate is expected to vote on the nominations today. “Senate Panel Clears Nominees to SEC,” Wall St. J. (July 29, 2005) at C3. 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 LM-10 Advisory July 22, 2005 1:59 PM The Department of Labor (“DOL”) considers investment advisers that do business with labor organizations to be “employers” under the Labor-Management Reporting and Disclosure Act of 1959 (“LMRDA”), and is requiring investment advisers to file each year a Form LM-10 in which they publicly disclose all financial transactions or arrangements made between them and any representative of a labor organization, provided that the value of any such transaction exceeds twenty-five dollars ($25). The DOL recently posted on its website a Form LM-10 Advisory, stating that the Office of Labor-Management Standards (“OLMS”) intends to issue guidance on and set a grace period deadline for filing the Form LM-10. The DOL will not take action to enforce the Form LM-10 reporting requirements, unless there is already a pending investigation, until the OLMS issues its guidance and the grace period has expired. U.S. Department of Labor, Form LM-10 (Employer Reports) Advisory, at http://www.dol.gov/esa/regs/compliance/olms/lm10_advisory.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 Securities Division Reaches Agreement with Firm on Selling Variable Annuities to Seniors July 22, 2005 1:57 PM The Massachusetts Securities Division entered into a Memorandum of Understanding with an investment advisory and brokerage firm (“Firm”) in connection with the sales of variable annuity products to Massachusetts customers that were 75 years old and older when they purchased the products. Under the agreement, the Firm will allow customers that were 78 years old and older at the time of purchase to surrender their variable annuity contracts for the full amount of the current contract value in the annuity without requiring a surrender fee, and will refund the surrender fee for any such customer that has already surrendered their variable annuity contract. The Firm also is providing customers that were 75-77 years old at the time of purchase with an expedited review of any suitability concerns relating to their investment. Finally, the Firm agreed to institute certain sales practices regarding the sale of variable annuities to customers, including verbal and written disclosures to all customers of the fees, costs and restrictions associated with variable annuities, encouraging senior customers to consult with family members or a trusted advisor regarding variable annuities, and strengthening the implementation of their suitability guidelines for variable annuities. Press Release, Secretary of the Commonwealth, Secretary Galvin Reaches Agreement with Bank of America on Variable Annuities (July 13, 2005); Memorandum of Understanding Between the Massachusetts Securities Division and Banc of America Investment Services, Inc. (July 12, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
State of New Hampshire Bureau of Securities Regulation Settles with Firm for Failing to Disclose Conflicts of Interest July 22, 2005 1:53 PM The New Hampshire Bureau of Securities Regulation settled an administrative proceeding with an investment advisory and brokerage firm (“Firm”), with the Firm agreeing to pay the state $5 million in fines and penalties, up to $2 million in restitution to New Hampshire investors, and $375,000 to reimburse the New Hampshire Bureau of Securities Regulation for their investigation costs. The Firm allegedly failed to disclose conflicts of interests, including revenue sharing and directed brokerage arrangements with non-proprietary mutual funds, and pressured advisory representatives to sell and rewarded them for selling proprietary mutual funds. Additionally, the Firm allegedly represented that the advisory representatives were designing portfolios according to the client’s individual needs, while the representatives actually provided to clients generic portfolios containing proprietary mutual funds that underperformed other available products. Press Release, State of New Hampshire Department of State, Bureau of Securities Regulation, American Express Financial Advisors Reach Settlement with New Hampshire Bureau of Securities Regulation (July 12, 2005); In the Matter of American Express Financial Advisors Inc., Settlement Agreement, No. INV04-122 (July 12, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC Decision Upheld: 12b-1 Fees and Disgorgement July 22, 2005 1:48 PM The United States District Court for the Southern District of New York dismissed a fraud claim, brought under Section 10(b) of the Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and state law theories against the administrator of certain hedge funds that invested in mortgage-backed and related securities (“Administrator”). The Administrator allegedly provided inflated NAVs for the funds in reports that it disseminated to the plaintiffs. The Court found that the plaintiffs did not “state with particularity facts giving rise to a strong inference” that the Administrator acted with the requisite scienter. The plaintiffs alleged that the Administrator acted with “conscious misbehavior or recklessness” by relying on prices of the securities in the funds' portfolios that the funds' manager provided to calculate the funds’ NAVs, even though those prices were higher than the prices that the Administrator received from a third party. The Court found that this evidence was insufficient to show that the disparity between the prices created a red flag because the plaintiffs failed to allege that: (1) the third party’s models or judgments were superior to the manager’s; (2) the differences in valuation were outside the range of pricing that was normal in the industry; or (3) the Administrator had any reason to think that the third party’s prices were superior. The Court noted that the valuation for mortgage-backed securities and other non-exchange listed securities involves the exercise of judgment, and that prices may differ depending upon the model used for calculations. Consequently, simply alleging that the Administrator was aware of a disparity between valuations from two sources was insufficient. Additionally, the plaintiffs failed to present sufficient evidence in the offering memorandum or in other documents that the Administrator had an obligation or the expertise to independently calculate or verify the prices of the securities in the funds’ portfolios. BNA Securities Law Daily, July 15, 2005; Fraternity Fund Ltd v. Beacon Hill Asset Management LLC, 2005 WL 1607750 (S.D.N.Y. 2005). The United States Court of Appeals for the Ninth Circuit held that the SEC did not abuse its discretion when it calculated disgorgement fees and concluded that an adviser and its principal (“Petitioners”) improperly sought reimbursements from a fund’s 12b-1 fees. The SEC had asserted a 12b-1 violation for seeking and obtaining reimbursements for “ordinary operating expenses” from the fund’s 12b-1 plan, and for failing to honor representations in the funds’ prospectus and advisory agreement that the adviser would absorb the costs and fees for managing the fund. The Court held that the fund’s board of directors’ approval of the reimbursements and the lack of clear SEC guidance about what constitutes a “marketing expense” were irrelevant. The Court stated that a disgorgement calculation requires only a reasonable approximation of the profits causally connected to the violation, and that any doubts should be resolved against the Petitioners. Accordingly, the Court found that the SEC did not abuse its discretion. The SEC relied on expert testimony comparing the capitalization required for operations and the adviser’s actual capitalization, and inferred that the difference could be deemed ill-gotten gains. BNA Securities Law Daily, July 13, 2005; Coxon v. SEC, 2005 WL 1526166 (9th Cir. 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
Financial Planning Association Files Revised Statement of Issues in Lawsuit Against SEC July 22, 2005 1:39 PM On July 11, 2005, the Financial Planning Association (“FPA”) filed a Revised Statement of Issues to Be Raised in the Court of Appeals for the District of Columbia (“Court”) in its action seeking review of Investment Advisers Act Rule 202(a)(11)-1. Rule 202(a)(11)-1 excludes from the definition of “investment adviser” under the Investment Advisers Act of 1940 certain broker-dealers that provide non-discretionary advice, solely incidental to their brokerage services, regardless of the form of compensation. Pursuant to the Court’s order of May 11, 2005, the FPA identified two issues that it expects to raise in its appeal: (1) whether the SEC may exclude broker-dealers that receive “special compensation” from the definition of an investment adviser under the Investment Advisers Act of 1940, where the statute only excludes broker-dealers from the definition if they receive “no special compensation”; and (2) whether the exemption for broker-dealers that receive “special compensation” violates the Administrative Procedure Act because it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Financial Planning Ass’n v. SEC, D.C. Cir., Case Nos. 04-1242, 05-1145. 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 with Broker for Failing to Retain E-mails July 22, 2005 1:33 PM The SEC settled an administrative proceeding it brought against a broker-dealer (the “Broker”) that allegedly failed to preserve employees’ e-mail communications in violation of the recordkeeping requirements of Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-4 promulgated thereunder. The SEC said that it, the New York Stock Exchange and the National Association of Securities Dealers discovered the alleged deficiencies during the course of inquiries into the firm’s research and investment banking activities, when the Broker was unable to produce all of the e-mails requested by the regulators. The SEC asserted that the Broker allegedly failed to preserve all e-mail communications relating to its business. Among other things, the SEC said that the Broker was unable to produce certain e-mails because several backup tapes for the e-mails were mislabeled, did not contain e-mail, contained corrupted and unreadable data, or had been recycled and written over in violation of the Broker’s policies. Some backup tapes were never found. Although the Broker had procedures that required the retention of electronic communications, the SEC alleged that these procedures were not adequate to ensure the preservation of the Broker’s electronic communications. The SEC ordered the Broker to cease and desist from committing further violations of the federal securities laws, and censured the Broker. The Broker agreed to pay $2.1 million in penalties and fines, including $700,000 to the U.S. Treasury, $700,000 to the NYSE, and $700,000 to the NASD. Additionally, the Broker agreed to review its procedures for preserving electronic communications and, within 90 days, inform the staff that it has completed the review and established systems and procedures reasonably designed to achieve compliance with those laws, regulations, and rules concerning the preservation of electronic mail communications. In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 52022 (July 13, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
Form LM-10: New Reporting Obligations July 15, 2005 3:07 PM Investment advisers that do business with labor organizations should be aware of an issue regarding their disclosure obligations under the Labor-Management Reporting and Disclosure Act of 1959 (“LMRDA”). The Department of Labor ("DOL") has recently taken the position that it considers investment advisers "employers" under the LMRDA. The DOL is therefore of the opinion that investment advisers must file each year a Form LM-10 in which they publicly disclose all financial transactions or arrangements made between them and any representative of a labor organization, provided that the value of any such transaction exceeds twenty-five dollars ($25). According to publications by the DOL and informal conversations with DOL representatives, this means that an investment adviser must report every instance in which it provided a union trustee with anything worth over $25. The disclosure requirement is all-inclusive and applies to, among other things, lunches, golf outings, sporting event tickets, dinners, receptions, and Christmas parties. The DOL also takes the position that even charity events sponsored by an investment adviser must be reported, reasoning that, although the proceeds of the event went to charity, a union trustee in attendance has been provided with a “thing of value.” Union trustees are, in turn, required to publicly disclose on a Form LM-30 their receipt of anything of value from an investment adviser (provided that the value exceeded $25). Penalties for willful violation of the LMRDA include fines of not more than $10,000 and/or imprisonment for not more than one year. The DOL recently extended an existing grace period deadline for filing the Form LM-30 from July 15, 2005 to August 15, 2005. The DOL has not yet decided upon the grace period deadline extension for filing the Form LM-10, though recent conversations with DOL representatives indicate that the deadline may be set for sometime in September. No challenges to the DOL’s recent interpretation of the LMRDA have yet been made and, as of the writing of this news summary, the DOL’s position remains firm that investment advisers must comply with the LMRDA and file the Form LM-10. 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. |
U.S. Chamber of Commerce files petition in the U.S. Court of Appeals for the District of Columbia Circuit Challenging Mutual Fund Governance Rules July 15, 2005 2:43 PM On July 7, the U.S. Chamber of Commerce filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit challenging the mutual fund governance rules for a second time. The petition alleged that the Commission failed to address the deficiencies identified by the same court in its June 21, 2005 opinion when the Commission voted to re-adopt the mutual fund governance rule on June 29, 2005. The mutual fund governance rule was first adopted by the SEC in July 2004 and requires that, by January 16, 2006, most mutual fund boards have an independent chairman and 75% independent directors. The U.S. Chamber of Commerce challenged the rule, arguing that it violated the Administrative Procedures Act. The D.C. Circuit Court of Appeals held that, although the SEC had the power to adopt the rule, it had failed to consider adequately the rule’s costs and alternatives. The opinion specifically directed the Commission to consider at least one alternative to the independent chair requirement: required disclosure as to whether the chairman is independent. At the public meeting re-adopting the rule, former-Chairman William Donaldson expressed his opinion that the court’s decision did not require the SEC to conduct the rulemaking process again. Chairman Donaldson further stated that the disclosure alternative suggested by the court would not prevent conflicts of interest as effectively as requiring an independent chairman. The Commission again voted 3-2 to adopt the rule without amendment. BNA Securities Law Daily, July 8, 2005; U.S. Chamber of Commerce v. SEC, D.C. Cir., Case No. 05-1240. This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
NASD fines brokerage firm $325,000 for conducting sales contests for the firm’s brokers and managers July 15, 2005 2:18 PM The NASD fined a brokerage firm $325,000 for conducting sales contests for the firm’s brokers and managers. The firm had conducted various sales contests between 2001 and 2003 designed to promote the sale of variable life and variable annuity products. The awards included weekend trips and gift cards, and the total value of the awards given exceeded $200,000. The NASD’s rules require that if a brokerage firm conducts a sales contest to promote a particular product line, the contest must cover all products within that line. Further, the contest must give equal weight to all covered products. The NASD found that the firm’s contest improperly gave greater weight to sales of its proprietary products than it gave to non-proprietary sales. The NASD also found that the non-cash compensation involved was substantial enough to create conflicts of interest for brokers, which the contest rules are supposed to prevent. The NASD’s fine included settlement for the firm’s alleged violation of the NASD’s email retention rule, which requires that brokerage firms retain emails for at least three years. The firm failed to retain the emails of 83 employees, including those of a few managers who approved some of the sales contests in question. The NASD further found that the firm did not maintain adequate procedures and supervisory systems with respect to the NASD’s non-cash compensation rules. NASD Fines Hornor, Townsend & Kent, Inc. $325,000 For Improper Sales Contests, Email and Supervision Violations, NASD News Release, July 6, 2005. This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
Administrative Law judge dismisses charges brought by the SEC against a registered investment adviser and its majority owner July 15, 2005 2:13 PM An administrative law judge has dismissed charges brought by the SEC against a registered investment adviser and its majority owner. The Commission instituted proceedings against the investment adviser alleging that it had defrauded clients by misappropriating $7500 that was paid to the adviser by a brokerage firm that acted as custodian of the adviser’s clients’ accounts, and that the adviser had not properly amended its Form ADV. Allegedly, the $7500 payment was intended to reimburse clients who incurred account termination fees by transferring their accounts to the new custodian. The SEC alleged that the adviser used the money to pay its own operating expenses instead. After the custodian paid the adviser the reimbursement, the adviser deposited the funds into its operating account and did not segregate the funds. Nonetheless, the adviser reimbursed its clients over $20,000 by giving them credits against their management fees to cover fees they incurred in transferring their accounts to the new custodian. The judge found that, despite the co-mingling, the adviser did not misappropriate the assets. Rather, the judge found that the record showed that the adviser had “worked diligently to secure a custodian that would save their clients a substantial amount of money.” The adviser had also been charged with failing to update its Form-ADV to reflect the $7500 payment as “additional compensation” it received from the custodian. The judge similarly dismissed these charges, concluding that the payment did not constitute compensation to the adviser. In the Matter of Brandt, Kelly & Simmons, LLC, and Kenneth G. Brandt, Initial Decision Release. No. 289 (June 30, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC files a civil injunctive action in the United States District Court for the Southern District of New York against a registered representative of a broker-dealer July 15, 2005 2:09 PM The SEC filed a civil injunctive action in the United States District Court for the Southern District of New York against a registered representative of a broker-dealer (the “Broker”) who allegedly assisted customers in late trading and market timing. He is accused of violated Section 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Specifically, the SEC alleged that the Broker allowed certain customers to submit mutual fund orders after 4:00 p.m. and then executed the trades as if the orders had been submitted prior to that time. He further is alleged to have falsified books and records to reflect that the orders were submitted prior to 4:00 p.m. The Broker also allegedly assisted customers that mutual fund complexes suspected of market timing. Forty funds had sent over 300 letters to the Broker, directing him to stop actively trading the funds on behalf of customers. Allegedly to evade further scrutiny, the Broker assisted the customers in opening new accounts for the customers and used different registered representative identification numbers when executing the trades. Securities and Exchange Commission v. Scott A Christian, 05 CV 6239 (S.D.N.Y.), Litigation Release No. 19294 (July 7, 2005). This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
The SEC’s staff provided guidance to companies, including mutual funds, and shareholders regarding Rule 14a-8 July 15, 2005 2:01 PM The SEC’s staff provided guidance to companies, including mutual funds, and shareholders regarding Rule 14a-8 (the “Rule”) under the Securities Exchange Act of 1934, which addresses when such companies must include shareholder proposals in their proxy materials. Specifically, the staff discussed the following topics: Staff Legal Bulletin No. 14C, June 28, 2005. This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC Brings Action Against Hedge Fund July 8, 2005 3:34 PM On June 22, 2005, the SEC filed an injunctive action to halt fraudulent conduct by a hedge fund, its investment adviser, and the adviser’s principal. On the same day, the U.S. District Court for the Southern District of New York issued a temporary retraining order that, among other things, appointed a temporary receiver. The SEC’s complaint alleges that the defendants concealed investment losses from investors, sought to honor unfairly a redemption request at inflated values to conceal the fraud, and made false statements to investors and prospective investors about the fund’s performance. The complaint also alleges that the adviser’s principal altered financial statements that concealed the fund’s losses. The complaint alleges violations of Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is also seeking additional relief, including permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties. 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. |
President Bush Names Cynthia Glassman As Acting SEC Chair July 8, 2005 3:11 PM On June 30, 2005, President Bush named SEC Commissioner Cynthia Glassman to serve as acting SEC Chair. Glassman steps in for former Chairman William Donaldson, who left the SEC the same day. 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. |
Associations Release Investment Advisory Profession Profile July 8, 2005 8:43 AM On June 29, 2005, the IAA and NRS published their fifth annual report on the state of the investment adviser profession, updating information on SEC-registered advisers using data from the Investment Adviser Registration Depository (“IARD”). The 2005 report contains data on number of registered advisory firms, assets under management, employees, advisory and other business activities, types of advisory clients, compensation, custody, and financial industry affiliations. The report reveals several key findings: The number of entities registered with the SEC as investment advisers as of April 2005 is 8,614, compared with 8,302 registered a year ago. The total number of SEC registered advisers has increased by 13.5% since April 2002. Assets under management by SEC registered advisers stands at $26.5 trillion -- a 21% increase since 2002. Discretionary assets grew from $21.13 trillion in 2004 to $24.3 trillion in 2005. Although they only represent 4.1% of all registered investment advisers, the 359 firms managing $10 billion or more collectively managed 83% of all reported discretionary assets under management. Only 58% of advisers reported that they receive research and other products using client commissions. The associations noted that the number may be understated, due to confusion resulting from ambiguous wording of related questions in Form ADV part 1. Only 54.6% of registered investment advisers have named a chief compliance officer on Form ADV. Another 6.2% have identified someone with “compliance” in his or her title. The full text of the report is available at http://www.icaa.org/public/evolution_revolution-2005.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. |
ABA Subcommittee Seeks Clarification of New Registration Requirement July 8, 2005 8:39 AM On June 23, 2005, the Chair and Vice Chair of the Subcommittee on Private Investment Entities of the Committee on Federal Regulation of Securities of the ABA’s Section of Business Law submitted a letter to the Division of Investment Management outlining a list of interpretive issues related to the new rules and amendments that require certain hedge fund advisers to register as investment advisers. The letter makes recommendations as to the resolution of many of these interpretive issues and requests that the SEC staff issue interpretive guidance addressing these issues. The letter first identifies a number of issues arising under the rules requiring hedge fund advisers to register as investment advisers, and the release adopting those rules. These issues include, among other matters, the scope of the two-year lock-up requirement, redemptions by the adviser and its employees, withdrawals of incentive allocations and fees, redemptions by feeder funds in a captive master-feeder structure, registration of related entities and affiliates, application of the rules to offshore subadvisers, and other issues relating to the definition of “private fund.” The letter then discusses additional issues already existing under the Investment Advisers Act that will take on more significance for hedge fund advisers once they are required to register, including trading issues (principal transactions and rebalancing), the need for clarification of how to answer certain items on Form ADV, custody requirements, proxy voting, and record retention. The full text of the letter is available at http://www.abanet.org/buslaw/committees/CL410000pub/comments/20050705000000.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. |
Chief Accountant Says Fund Companies Improperly Treat Principal as Dividends July 8, 2005 8:25 AM On June 27, 2005, Brian Bullard, chief accountant of the SEC’s Division of Investment Management reportedly told attendees at the National Association for Variable Annuities’ 2005 Regulation and Compliance Conference that numerous fund companies have not properly disclosed whether payouts to investors represent investment gains or the return of principal. According to Bullard, funds have not included with their dividend payments notices under Investment Company Act Rule 19a-1 indicating for shareholders the source of payouts. Bullard noted that the problem is most common with closed-end funds, partly because many of them try to maintain a stable dividend. According to the article, the SEC has indefinitely suspended exemptive relief for all new managed payout plans due to its concern about the source of such payments. He declined to say whether the Commission intends to bring any disciplinary action related to the issue. Angela Pruitt, SEC Heightens Scrutiny of Return of Capital Disclosure, Dow Jones Newswires, June 27, 2005. This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC Sues online adviser and releases Investor Alert regarding “Auto-Trading” July 1, 2005 8:54 AM The SEC filed civil charges against a Vermont investment advisory firm (the “Adviser”) and its principal for violations related to their operation of “auto-trading” programs, alleging that the Adviser and its principal used misleading performance projections in marketing the auto-trading programs to clients. The SEC also issued an Investor Alert, “All About Auto-Trading.” Background “Auto-trading” is a relatively new, but rapidly spreading, investment vehicle in which subscribers to online investment newsletters open designated auto-trading accounts at brokerage firms selected by the newsletters. The auto-trading clients sign an agreement with the brokerage firm giving the online adviser authority to automatically direct trades in the client’s personal brokerage account. Auto-trading services are typically offered as an additional service provided by publishers of online financial newsletters. The financial newsletters usually require subscribers to pay a fee to auto-trade in addition to the subscription fee paid to receive the general newsletter. Once the brokerage account is established, the online adviser sends specific trading instructions directly by e-mail or facsimile to the broker-dealer. These instructions are timed to take advantage of market events, and the client learns of the trades only after they have been executed by the broker. SEC Complaint The complaint filed in the U.S. District Court in the District of Vermont alleges that the Adviser and principal have had more than 1200 clients who have invested through the Adviser’s auto-trading programs. The complaint also charges that the Adviser and principal published performance projections in which they stated subscribers could expect annualized returns of 100% by following the principal’s trading strategies, while at the same time portfolios following these strategies were actually experiencing substantial losses. In this action, the SEC seeks permanent injunctive relief, disgorgement of illegal profits with prejudgment interest and civil monetary penalties based on violations of antifraud provisions the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 and the rules thereunder. Investor Alert The SEC also issued an Investor Alert, “All About Auto-Trading,” which lists the steps investors should take to thoroughly check out any auto-trading program before they hand over access to their accounts and hard-earned dollars. The alert explains auto-trading, arms investors with questions to ask, and provides time-tested tips for avoiding costly mistakes. The SEC’s Investor Alert on auto-trading is available at http://www.sec.gov/investor/pubs/autotrading.htm. SEC Press Release 2005-98 (July 1, 2005) This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
Continued listing criteria for closed-end funds approved by SEC; minimum capitalization will not increase July 1, 2005 8:52 AM The SEC recently published for comment, and granted accelerated approval to, a proposal filed by the New York Stock Exchange, Inc. (“NYSE”) to strengthen its continued listing standards. As recommended by the Investment Company Institute (“ICI”), the minimum average market capitalization requirement in the listing criteria for closed-end funds will remain at $15 million, (rather than being increased to $25 million, as proposed). Accordingly, the NYSE will initiate suspension and delisting procedures with respect to any closed-end fund if its average market capitalization over 30 consecutive trading days is below $15 million. Also, as recommended by the ICI, the notification threshold will remain at $25 million (rather than being increased to $35 million, as proposed). Therefore, the NYSE will notify a closed-end fund if its average market capitalization falls below $25 million. ICI Memorandum No. 18978 (June 28, 2005) This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |
SEC re-adopts fund governance rules shortly after review required by U.S. Court of Appeals July 1, 2005 8:46 AM At an open meeting held June 29, 2005, the SEC re-adopted by a vote of 3-2 amendments to certain rules under the Investment Company Act of 1940 (the “Fund Governance Rules”) that condition the reliance on certain exemptive rules (i.e., allow funds to engage in certain otherwise prohibited transactions if they comply with the applicable exemptive rules) upon, among other things, a fund having (1) a board of directors consisting of at least 75% independent directors, and (2) an independent chairman. As reported in last week’s Investment Management Industry News Summary, in response to a challenge by the U.S. Chamber of Commerce, the United States Court of Appeals for the District of Columbia ordered the SEC to address certain “deficiencies” in the adoption of the Fund Governance Rules. The court held that the SEC promulgated the rule without adhering to the requirements of the Administrative Procedures Act in (a) failing adequately to consider the costs funds would incur in complying with the conditions, and (b) failing adequately to consider a proposed alternative to the independent chairman condition. The court required the SEC to determine as best it could the economic implications of the rule amendments and to consider a disclosure alternative proposed by dissenting SEC Commissioners Paul Glassman and Cynthia Atkins. Nevertheless, the SEC re-adopted the Fund Governance Rules shortly after the June 21 court ruling by the same 3-2 margin, with Commissioners Glassman and Atkins dissenting again. The re-adoption of the Fund Governance Rules also coincided with the next-to-last day of Commissioner Donaldson’s term as SEC Chairman. Reportedly, the U.S. Chamber of Commerce, which challenged the original rule, is expected to announce that it plans to file another lawsuit in an attempt to block the re-adopted Fund Governance Rules. This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. |