Investment Management Industry News Summary - July 2009

Investment Management Industry News Summary - July 2009

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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D.C. Circuit Affirms the SEC’s Authority to Regulate Certain Annuities while Remanding the Specific Rule

July 31, 2009 9:28 AM

On July 21, 2009, a unanimous three-member panel of the D.C. Circuit Court of Appeals delivered its decision in American Equity Life Insurance Co., et al., v. SEC. The case involved a review of the SEC’s new Rule 151A, which redefined the term “annuity contract” to exclude fixed indexed annuities, making this type of annuities subject to the federal securities laws rather than simply the state insurance laws. The rule was to have taken effect in January 2011.

The court affirmed the SEC’s general authority to regulate indexed annuities by holding that the SEC’s interpretation of “annuity contract” to exclude fixed indexed annuities was reasonable, and the rule reasonably drawn. However, the court also held that the SEC had failed to properly analyze the rule’s effect on efficiency, competition, and capital formation pursuant to Section 2(b) of the Securities Act. As a result, the court remanded Rule 151A to the SEC for further consideration. While this decision nullifies the current rule, the court left the door open for further regulations in this area. The court noted that following a more thorough analysis, the SEC may once again determine that the rule has a positive effect on efficiency, competition, and capital formation.

For more information, please see:

American Equity Investment Life Insurance Company, et al. v. Securities and Exchange Commission (D.C. Cir. 2009), No. 09-1021.

 
 
 

 
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 Chairman Schapiro Testifies Concerning the Regulation of Systemic Risk and the Obama Administration’s Financial Regulatory Reform Proposal

July 31, 2009 9:25 AM

On July 23, 2009, SEC Chairman Schapiro testified before the Senate Committee on Banking, Housing and Urban Affairs concerning the regulation of systemic risk. Chairman Schapiro identified two types of systemic risk. These include: (i) the risk of sudden systemic failures; and (ii) the long-term risk that the system will favor large institutions over small competitors and impair the system’s ability to innovate and adapt. She also emphasized the need to take a two-pronged approach to systemic risk regulation which includes both traditional oversight by individual agencies and a single systemic risk regulator. Chairman Schapiro first emphasized the continued need for traditional oversight and outlined the essential components of such regulation. She indicated that it is crucial that the same rules apply to the same or similar products and participants. The regulatory framework must eliminate regulatory gaps and prevent market participants from engaging “in enormous, virtually unregulated trading in synthetic versions of other, often regulated financial products.” Chairman Schapiro also highlighted the importance of improving market transparency and comprehensive risk disclosure as well as an active enforcement of existing laws and regulations. Next, Chairman Schapiro endorsed the idea of a single systemic risk regulator combined with a financial oversight council. But the Chairman indicated that the oversight council must be given greater authority than the scope proposed by the Administration. Finally, Chairman Schapiro expressed support for developing a credible resolution mechanism to facilitate controlled unwinding of those institutions that are deemed “too big to fail.”

On July 22, Chairman Schapiro testified before the House Committee on Financial Services, providing a regulatory perspective on the Obama administration’s financial regulatory reform proposals. Chairman Schapiro expressed support for the Administration’s securities-related proposals while emphasizing the essential role played by the SEC. For example, the Chairman noted the importance of bringing all securities-related OTC derivatives under the umbrella of the federal securities laws and within the SEC’s purview. Chairman Schapiro similarly supported the Administration’s proposals to harmonize securities and futures regulation; require hedge funds to register as investment advisers; coordinate investment adviser and broker-dealer standards of conduct for similar activities; strengthen regulation of credit rating agencies; expand the scope of the SEC’s enforcement tools; and employ a financial stability oversight council.

For more information, please see:

http://www.sec.gov/news/testimony/2009/ts072309mls.htm

http://www.sec.gov/news/testimony/2009/ts072209mls.htm

 
 
 

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

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

SEC Chairman Provides Legislative “Wish List”

July 31, 2009 9:19 AM

On July 24, 2009, several media outlets reported that the SEC responded to a request from a member of Congress and provided a “wish list” of changes to the federal securities laws.

Notable highlights include legislative changes that would authorize the SEC to:

  • Impose collateral bars when a regulated person violates one or more of the federal securities laws;
  • Have increased access to grand jury materials when the materials contain information that is critical to an SEC cooperative investigation – this would mirror the access currently authorized for banking regulators;
  • Bring civil actions against persons who obstruct SEC investigations;
  • Require custodians for funds and investment advisers to maintain records and allow SEC inspections; and
  • Place penalties in a fair fund even when the penalty does not involve disgorgement.

For more information and a copy of the full wish list, please see:

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/16/AR2009071603234.html

 
 
 

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

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

SEC Proposes to Amend Disclosure Rules Regarding Executive Compensation and Governance

July 31, 2009 9:15 AM

On July 10, 2009, the SEC proposed amendments to the disclosure rules regarding executive compensation and governance. Several of the proposed amendments, if enacted, will impact directors of registered investment companies. For example:

The proposed rule would require additional disclosures in proxy and information statements where action is to be taken with respect to the election of directors, including requiring disclosure of:

  • The specific experience, qualifications or skills that qualify that each director up for election (whether an incumbent or nominee) to serve as a director and committee member (such as risk assessment skills, pertinent past experiences or subject-matter expertise);
  • Any directorships held by each director and nominee at any time during the past five years at public companies – even if the position is no longer held;
  • Legal proceedings involving executive officers, directors, or director nominees within the past ten years – (increased from five years);
  • Whether the board chair is an “interested person” of the fund, as defined in Section 2(a)(19) of the Investment Company Act; and
  • If the board chair is an interested person, whether it has a lead independent director and what specific role the lead independent director plays in the leadership of the fund.

The proposed amendments also would require a fund to include each of these disclosures (with the exception of the legal proceedings) in its statement of additional information.

For a more detailed discussion, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9212

 
 
 

 
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 Took a Series of Steps Designed to Thwart Abusive Short-Sale Practices

July 31, 2009 9:12 AM

On July 24, 2009, the SEC took a series of steps designed to further protect against abusive short-sale practices. First, in anticipation of Interim Final Temporary Rule 204T’s expiration at the end of this month, the SEC adopted its permanent replacement. The new rule, Rule 204, differs only slightly from Rule 204T, which made it a violation of Regulation SHO if a clearing firm did not purchase or borrow shares to close-out a "fail to deliver" resulting from a short sale in any equity security by no later than the beginning of trading on the day after the fail first occurs. The minor differences reflect changes the Commission made to accommodate constituent concerns. Rule 204 becomes effective on July 31, 2009.

Second, the SEC has declined to renew Temporary Rule 10a-3T and indicated that it will work with several self-regulatory organizations to make short-sale volume and transaction data available through the SRO websites. The disclosures through the SRO websites are expected to be more expansive that those required through Temporary 10a-3T and will likely include: (i) daily publication of aggregate short sale volume information; (ii) disclosure of short sale transactions on a one-month delayed basis; and (iii) twice monthly disclosure of fails data. In addition, the SEC continues to consider proposals regarding short-sale price tests and circuit breaker restrictions.

Finally, the SEC announced it will host a public roundtable on September 30, 2009 on short-sale activities. Specific topics are likely to include: securities lending, pre-borrowing, short sale disclosures and the addition of a short sale indicator to the tapes where transactions are reported for exchange-listed securities.

For a more detailed discussion, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9211

 
 
 

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

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

SEC Proposes Amendments to Municipal Securities Disclosure Requirements; Provides Guidance on Fulfilling Obligations Under the Anti-Fraud Provisions

July 31, 2009 9:06 AM

On July 15, 2009, the SEC proposed amendments to the municipal securities disclosure rules, seeking to decrease the disparity between information available regarding municipal and corporate securities.

Rule 15c2-12 currently prohibits brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government that issued municipal bonds has agreed to provide ongoing, continuing disclosure of the events listed in the rule when they are material. The proposed amendments require notice of these events to be provided within 10 days and eliminate the materiality requirement for five of the listed events. The proposed amendments also add the following events to the list: (i) tender offers; (ii) bankruptcy, insolvency, receivership or similar proceeding; (iii) mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination; and (iv) appointment of a successor or additional trustee or the change of the name of a trustee, if material. The proposed amendments will also expand the scope of the rule to cover variable rate demand obligations.

In the proposing release, the SEC also provided interpretive guidance regarding underwriters’ obligations under the anti-fraud provisions of the securities laws. Specifically, the SEC reaffirmed its earlier guidance on the topic and provided examples of steps that would indicate an underwriter is meeting its “reasonable basis” obligations. Examples include: reviewing the issuer’s disclosure documents for accuracy and completeness; affirmatively inquiring whether the issuer has a history of “persistent and material breaches” of the ongoing disclosure requirements; and review a near final official statement before bidding or purchasing securities in connection with an offering.

For more information, please see:

http://www.sec.gov/news/press/2009/2009-161.htm

The proposing release can be found at:

http://www.sec.gov/rules/proposed/2009/34-60332.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 Proposes Regulation of Campaign Contributions by Investment Advisers

July 31, 2009 9:02 AM

On July 22, 2009, the SEC resurrected a version of its 1999 proposal to regulate campaign contributions by investment advisers in an effort to curtail pay-to-play practices. The SEC voted to propose rules, similar to MSRB Rule G-37, that would prohibit contributions designed to influence the selection of investment advisers for public pension plans, 529 Plans and other government investment accounts. While the SEC has the authority to pursue pay-to-play schemes under the current anti-fraud provisions, proving that a specific quid pro quo existed is sufficiently difficult that the SEC has determined this targeted approach is necessary.

The proposing release was not publicly available as of the date of this News Summary, however, the Commissioners have described several aspects of the proposed rule. First, the proposed rule would provide that when an investment adviser makes a contribution to an elected official who is in a position to influence the selection of an adviser for a government investment account, the contributing adviser will be prohibited from providing advisory services for compensation to that government entity for a period of two years. The prohibition would also apply if an adviser solicits contributions for an elected official. The proposed rule would cover contributions made by the investment adviser itself, certain executives and employees of the adviser, and contributions directed by one of these persons through third parties (including attorneys, family members or affiliated companies). The proposed rule would define “elected officials” to include candidates for office as well as incumbents.

Finally, Chairman Schapiro noted that the rule would generally apply to advisers of pooled investment vehicles, such as mutual funds, that are typically used as investment vehicles in 529 Plans. The 1999 proposed rule would have applied to all investment advisers that are not prohibited from registering with the SEC. As a result, it would not have applied to small or state-registered investment advisers, but would have applied to federally registered advisers and those advisers exempt from registration under Section 203 of the Advisers Act. It is not yet clear whether the rule the SEC voted to propose on July 22nd would extend to this spectrum of advisers.

For a more information, please see:

http://www.sec.gov/news/speech/2009/spch072209mls.htm

http://www.sec.gov/news/speech/2009/spch072209tap.htm

http://www.sec.gov/news/speech/2009/spch072209laa.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.

Secretary of Treasury Geithner Testifies Concerning Regulation of Over-The-Counter Derivatives

July 17, 2009 12:53 PM

On July 10, 2009, Treasury Secretary Geithner testified before a joint hearing of the House Committees on Financial Services and Agriculture on Regulation of OTC Derivatives. Secretary Geithner’s testimony set out seven steps for reforming regulation of the OTC derivative markets:

  • Treasury proposes to require that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems.
  • Through capital requirements and other measures, Treasury proposes to encourage substantially greater use of standardized OTC derivatives and thereby facilitate substantial migration of OTC derivatives onto central clearinghouses and exchanges.
  • Treasury proposes to require all OTC derivative dealers, and all other major OTC derivative market participants, to be subject to substantial supervision and regulation, including conservative capital requirements; conservative margin requirements; and strong business conduct standards.
  • Treasury proposes to make the OTC derivative markets more transparent by giving relevant regulators access on a confidential basis to the transactions and open positions of individual market participants and giving the public access to aggregated data on open positions and trading volumes. The SEC and CFTC would impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives and OTC derivatives that were not centrally cleared would be reported to a regulated trade repository on a timely basis.
  • Treasury proposes to provide the SEC and CFTC with clear authority for civil enforcement and regulation of fraud, market manipulation, and other abuses in the OTC derivative markets.
  • Treasury will work with the SEC and CFTC to tighten the standards that govern who can participate in the OTC derivative markets.
  • Treasury will continue to work with its international counterparts to help ensure that its strict and comprehensive regulatory regime for OTC derivatives is matched by a similarly effective regime in other countries.

Secretary Geithner also noted that Treasury, the SEC, and CFTC intend to send up draft legislation that will provide a clear allocation of oversight authority in the OTC derivatives market between the SEC and CFTC and have made great progress towards doing so.

Secretary Geithner’s prepared remarks can be found at:

http://www.treas.gov/press/releases/tg204.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.

Treasury Proposal Authorizes SEC to Set New Regulatory Standards for the Retail Financial Services Industry

July 17, 2009 12:50 PM

On July 10, 2009, the Treasury delivered to Congress draft legislation that would put into effect several of the legislative changes to the federal securities laws recommended in Treasury's June 17, 2009 white paper on financial regulatory reform. Most significantly, if enacted, the legislation would provide authority for the SEC to establish a new standard or standards of conduct for broker-dealers and investment advisers that provide investment advice about securities to "retail" investors. In addition, the legislation proposes that the SEC be required to examine and, if appropriate, to ban "compensation schemes," sales practices and conflicts of interest involving broker-dealers or investment advisers that are contrary to the public interest. The latter proposal is not limited on its face to financial intermediaries advising retail investors.

The legislation also directs the SEC to facilitate the provision of "simple and clear disclosures" to investors regarding the terms of their relationships with investment professionals. Separately, the legislation would authorize the SEC to impose the so-called "point of sale" disclosure requirements in connection with mutual fund sales. Presumably, the content of any such new disclosure requirements would be subject to the new "consumer testing" provision of the proposed legislation.

Other aspects of the legislation would (a) authorize the SEC to restrict or limit mandatory pre-dispute arbitration, compensate whistleblowers, and impose collateral bars, (b) make permanent the SEC's recently-established investor advisory committee, and (c) harmonize the liability for aiding and abetting under the federal securities laws.

For a more detailed discussion, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9195

 
 
 

 
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.

FINRA Proposes New Consolidated Rule on the Distribution and Sale of Investment Company Securities

July 17, 2009 12:46 PM

As part of the process of developing a new consolidated rulebook, FINRA has proposed FINRA Rule 2341 to replace NASD Rule 2830, which regulates member firms’ activities in the distribution and sale of investment company securities. Rule 2830 has been subject to much criticism on the grounds that its standards are quite unclear. The NASD last proposed to amend Rule 2830 in 2003, but abandoned the attempt after receiving many critical comments. Proposed Rule 2341 has some similarities to the 2003 proposal, but also some significant differences.

Proposed Rule 2341 would revise the disclosure requirements for cash compensation arrangements of NASD Rule 2830 in several respects. The proposed rule requires that standard “sales charges and service fees,” replacing “all cash compensation,” be described in the prospectus. The proposal also removes the term “special cash compensation” and instead requires prospectus disclosure where a member firm received greater or special sales charges or service fees than are ordinarily paid by the offeror for the sale of the same investment company securities. Of course, a member firm may not know the compensation paid by a fund complex to other members. To address this, the rule provides that member firm should assume it has entered into a special sales charge or service fee arrangement if it receives from an offeror additional sales charges or service fees above the standard dealer reallowance or commission described in the investment company’s prospectus, unless the prospectus makes clear that the additional compensation is being paid to all who sell the investment company's securities. The proposed rule also requires a member firm that receives cash payments in addition to the standard sales charges and service fees paid in connection with the sale of fund shares to make prescribed disclosures to its customers at the time accounts are opened. For existing accounts, the disclosures would be required to be made within 90 days of the effectiveness of the rule, or at the time the customer purchases shares of investment company after the effective date. FINRA seeks comment on how this information should be disclosed to investors, particularly given the availability of the Internet. Finally, the proposal adds supplementary material that clarifies provisions regarding the disclosure of cash compensation that would supersede all prior guidance with respect to these provisions.

Proposed Rule 2341 makes a minor change to the recordkeeping requirements for non-cash compensation. Among other things, NASD Rule 2830 requires member firms to keep records of all compensation received by member firms or its associated persons from offerors, other than small gifts and entertainment permitted by the rule. These records must include, “if known,” the value of any non-cash compensation received. The proposed rule would delete the phrase “if known.” Where a receipt or other documentation assigning value is not available, firms would be permitted to estimate in good faith the actual value of non-cash compensation.

Finally, the new FINRA Rule 2341(o) would codify earlier FINRA staff interpretive letters that permit the trading of ETF shares at prices other than the current net asset value consistent with applicable SEC rules or exemptive orders.

Comments on the proposed rule must be received by FINRA by August 3, 2009.

The release can be found at:

www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p119013.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 Charges Illinois-Based Hedge Fund Manager with Facilitating Multi-Billion Dollar Ponzi Scheme

July 17, 2009 12:43 PM

On July 10, 2009 the SEC announced fraud charges against an Illinois-based hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by a Minnesota businessman.

Beginning in 2002, the hedge fund manager and his firm raised approximately $2.62 billion from hundreds of investors through the sale of interests in three hedge funds they managed. The investors included individuals, retirement plans, individual retirement accounts, trusts, corporations, partnerships, and other hedge funds. Almost all of the funds’ assets were used to buy notes offered by the businessman and his companies.

The SEC’s complaint alleges that the hedge fund manager and his firm assured investors that they were taking specific steps to protect investor money and to verify the legitimacy of the businessman’s financing business. The hedge fund manager also allegedly created a series of bogus roundtrip payments to conceal that the businessman had been delinquent for months in repaying more than $130 million of notes. In addition, the SEC alleges that before the Ponzi scheme collapsed, the hedge fund manager and the firm wrongfully withdrew more than $40 million from the funds as purported fees, depositing the money into personal accounts and trusts.

For more information, please see:

http://www.sec.gov/news/press/2009/2009-156.htm

http://www.sec.gov/litigation/litreleases/2009/lr21124.htm

The complaint can be found at:

http://www.sec.gov/litigation/complaints/2009/comp21124.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 Chairman Schapiro Testifies Concerning Current Agenda and State of SEC Oversight

July 17, 2009 12:41 PM

On July 14, 2009, SEC Chairman Schapiro testified before the Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises of the House Committee on Financial Services concerning the current agenda and state of SEC oversight given the recent financial crisis. Chairman Schapiro mentioned several issues involving the regulation of investment advisers and investment companies.

Chairman Schapiro said that she has asked the staff to revisit the SEC’s 1999 proposal to address pay-to-play practices by investment advisers to public pension plans, and expects that the SEC will consider that proposal soon (The SEC has since announced that it will consider the proposal on July 22).

Chairman Schapiro also addressed target date funds, saying that the SEC will consider whether additional disclosure measures are needed to enhance investor understanding of target date funds and better align target date funds' asset allocations with investor expectations. She also noted that she has asked the staff to examine the use of a particular target date in a fund's name and whether that should be restricted or prohibited. In addition, Chairman Schapiro also expressed her support for the recommendation in the Administration's White Paper that advisers to hedge funds and other private pools of capital should be required to register with the SEC under the Advisers Act.
Chairman Schapiro also said that she has asked the SEC staff to prepare a recommendation on Rule 12b-1 under the Investment Company Act. She said that it is "essential…that the SEC engage in a comprehensive re-examination of Rule 12b-1 and the fees collected pursuant to the rule. If issues relating to these fees undermine investor interests, then we at the SEC have an obligation to adjust our regulations." It is not clear whether she expects to pursue the revisions to Rule 12b-1 that were floated by the SEC staff in 2007 and 2008 or whether she expects a new approach to the rule.

Finally, Chairman Schapiro also listed a number of possible legislative recommendations that staff had suggested including, surprisingly, repeal of Section 22(d) of the Investment Company Act. That section prohibits mutual fund underwriters and dealers from selling mutual fund shares at prices other than stated in a fund prospectus. Thus, it limits the ability of dealers to reduce front-end sales loads. In 1992, the SEC's Division of Investment Management recommended repeal of Section 22(d) in its report titled "Protecting Investors: A Half Century of Investment Company Regulation." The recommendation was widely criticized by the industry and went no further. Given all of the changes that have occurred in mutual fund distribution over the last 30 years, including the introduction of 12b-1 fees, multiple classes of shares, and sales load schedules, it is not clear that repeal of Section 22(d) would have much of an effect on mutual fund distribution practices.

For more information, please see:

http://www.sec.gov/news/testimony/2009/ts071409mls.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.

Treasury Proposes Registration of Fund Advisers; SEC Testifies in Support

July 17, 2009 12:36 PM

On July 15, 2009, the Department of the Treasury delivered to Congress draft legislation that would amend the federal securities laws to require the registration of investment advisers to hedge funds and other private investment pools. Treasury's June 17, 2009 white paper on financial regulatory reform recommended these changes. The “Private Fund Investment Advisers Registration Act of 2009” effectively would remove the private adviser exemption from registration for investment advisers with a place of business in the United States. The legislation thus would require registration under the Investment Advisers Act of 1940 of all managers of hedge funds, private equity funds, venture capital funds and family offices, other than those with less than $30 million of assets under management.

Also on July 15, the SEC testified before the Securities, Insurance, and Investment Subcommittee of the Senate Banking Committee in support of the “Private Fund Transparency Act of 2009” (“S. 1276”), introduced in June by Senator Jack Reed. S. 1276 is substantially similar to Treasury's draft legislation, although Treasury's legislation is more detailed. The SEC was represented by its Director of Investment Management, Andrew Donohue. Mr. Donohue testified that the SEC generally supports S. 1276, stating that: “[i]nvestment adviser registration in our view is appropriate for any investment adviser managing $30 million regardless of the form of its clients or the types of securities in which they invest.”

For a more detailed discussion, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9198

 
 
 

 
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 Treasury Department, Federal Reserve, and FDIC Release Joint Statement on Legacy Securities Public-Private Investment Program

July 10, 2009 1:28 PM

On July 8, 2009, the Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a joint statement announcing the fund managers initially chosen for the Legacy Securities Public-Private Investment Program (PPIP). Under the PIPP, Treasury will invest up to $30 billion of equity and debt in PPIFs established with the fund managers. These fund managers will raise equity capital from private investors and receive matching equity funds and leverage from Treasury to purchase legacy securities. Each PPIP fund manager will receive an equal allocation of capital from Treasury. The goal of the PPIP is to draw private capital into the asset-backed securities markets thereby allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses.

Initially, the PPIP funds will participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities. To qualify for purchase under the PPIP, the securities must have been issued before 2009 and have originally been rated AAA or an equivalent rating by two or more credit rating agencies without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets (Eligible Assets).

The Treasury has determined that the following firms may participate as fund managers in the initial round of PIPP:

  • AllianceBernstein, LP and its subadvisers, Greenfield Partners, LLC and Rialto Capital Management, LLC
  • Angelo, Gordon & Co., LP and GE Capital Real Estate
  • BlackRock, Inc.
  • Invesco Ltd.
  • Marathon Asset Management, LP
  • Oaktree Capital Management, LP
  • RLJ Western Asset Management, LP
  • The TCW Group, Inc.
  • Wellington Management Company, LLP

The Treasury selected these fund managers following a two-month application process, during which 100 applications were received. After this initial selection of fund managers, the Treasury may open the program to smaller fund managers.

For more information, please see:

http://www.ustreas.gov/press/releases/tg200.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.

Lori Richards, Director of the Office of Compliance Inspections and Examinations, to Leave the SEC

July 10, 2009 1:25 PM

On July 8, 2009, the SEC announced that Lori Richards, the Director of the Office of Compliance Inspections and Examinations plans to leave the agency on August 7, 2009. Ms. Richards has been the only Director of OCIE since it was created by Chairman Arthur Levitt in May 1995, fourteen years ago.

OCIE Associate Director-Chief Counsel John Walsh will serve as Acting Director of OCIE when Ms. Richards steps down. Mr. Walsh is a 20-year veteran of the SEC, including service in the Office of General Counsel, the Division of Enforcement, and as Special Counsel to Chairman Arthur Levitt. He has been in OCIE since its creation.

For more information, please see:

http://www.sec.gov/news/press/2009/2009-153.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.

Department of Treasury Proposes Legislation Creating the Consumer Financial Protection Agency

July 6, 2009 1:16 PM

On June 30, 2009, the Department of Treasury delivered to Congress draft legislation that would create the Consumer Financial Protection Agency (CFPA), as recommended in the Department’s June 17, 2009 report on financial regulatory reform. For the most part, the CFPA’s jurisdiction would not extend to persons or firms engaged in the securities business, but, in some areas, the proposed legislation would create indeterminate or overlapping authority with the SEC.

For a more in depth discussion, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9190

 
 
 

 
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 Charges New York-Based Firm and Representatives with Fraudulent Sales of Variable Annuities

July 6, 2009 1:09 PM

On June 30, 2009, the SEC charged a New York-based firm and several of its representatives and supervisors for their roles in fraudulent and unsuitable sales of variable annuities. According to the SEC’s order, the firm and its representatives lured senior citizens to buy annuities that were unsuitable investments due to the customers’ ages, liquidity needs, and investment objectives. The firm made these sales pitches at free-lunch seminars held at various restaurants in south Florida and allegedly concealed high costs, surrender periods, and other material information. The SEC also alleges that certain written disclosures provided to customers and other records in customer files were incomplete or inaccurate. In addition, the SEC alleges that the variable annuity products sold by the firm and its representatives paid approximately six percent in total sales commissions, compared to other investment products that generally paid less than three percent. Finally, the SEC charged that the firm and its supervisors did not properly implement the firm’s supervisory procedures. An administrative law judge will determine whether the allegations against the respondents are true and, if so, whether a cease and desist order, remedial sanctions, and/or penalties are appropriate and in the public interest.

This case demonstrates the SEC’s continued focus on “free-lunch” seminars and variable annuity sales practices. Recently, FINRA and the SEC have increased their focus on ensuring that broker-dealers fully understand the products they are selling, make appropriate suitability determinations, and provide necessary disclosures. In addition, the SEC has approved amendments to NASD Rule 2821 that will force firms to concentrate on their supervision, review, and approval of variable annuity transactions. Effective February 8, 2010, broker-dealers must implement procedures and systems to ensure that registered principals pre-approve the suitability of recommended purchases and exchanges based on enumerated suitability factors.

For more information on the enforcement proceeding, please see:

http://www.sec.gov/news/press/2009/2009-145.htm

http://www.sec.gov/litigation/admin/2009/33-9047-o.pdf

For more information on amendments to NASD Rule 2821, please see:

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p118954.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 Proposes Rule Amendments for Money Market Funds

July 6, 2009 1:04 PM

On June 30, 2009, the SEC published proposed comprehensive amendments to Rule 2a-7 and other rules under the Investment Company Act. The amendments largely track the recommendations of the Investment Company Institute’s Money Market Working Group. Comments on the proposed amendments are due September 8, 2009. For more information on the proposal, please see the WilmerHale Investment Management News Summary dated June 26, 2009, available at:

http://www.wilmerhale.com/publications/periodicals/investment_management/blog.aspx?entry=2375

The release can be found at:

http://www.sec.gov/rules/proposed/2009/ic-28807.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 Approves NYSE Rule Change on Proxy Voting by Broker-Dealers

July 6, 2009 12:52 PM

On July 1, 2009, the SEC approved an NYSE rule change that amends NYSE Rule 452 and corresponding Listed Company Manual Section 401.08 to eliminate broker discretionary voting in uncontested elections of directors. The proposal excepts investment companies registered under the Investment Company Act of 1940. In addition, the proposal codifies two previously published interpretations precluding broker-dealers from voting without instructions on any material amendment to the investment advisory contract with an investment company or on any proposal to obtain shareholder approval of an investment company’s advisory contract following a change in control of its investment adviser.

For more information, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9191

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9192

The release can be found at:

http://www.sec.gov/rules/sro/nyse/2009/34-60215.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.