Investment Management Industry News Summary - June 2007

Investment Management Industry News Summary - June 2007

Publications

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

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

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IRS Issues Guidance Limiting Tax Benefits Associated With Asset-Based Fees

June 22, 2007 8:54 AM

In a Chief Counsel Advice Memorandum released on May 25, 2007, the IRS considered how investors who paid flat fees in connection with a fee-based discretionary brokerage account should treat these fees for certain federal income tax purposes. These flat fees were paid for (1) brokerage commissions, (2) financial consultancy compensation, (3) custodian charges, and (4) account management fees the investor would otherwise be obligated to pay. In the past, some investors have capitalized similar fees, thereby increasing their cost basis in the account securities and, correspondingly, reducing their exposure to capital gains taxes on the ultimate sale or exchange of the securities. The IRS concluded that the flat fees cannot be capitalized but, instead, may only be deducted by individual investors as miscellaneous itemized deductions, which are permitted only to the extent that such deductions exceed 2% of the taxpayer’s adjusted gross income.

The Chief Counsel Advice Memorandum is available at: http://www.irs.gov/pub/irs-wd/0721015.pdf


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

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

Investment Company Institute (“ICI”) Submits Recommendations to Amend Rule 19a-1 under the Investment Company Act of 1940 (“1940 Act”)

June 22, 2007 8:51 AM

The ICI recently submitted a proposal to the SEC to amend Rule 19a-1 under the 1940 Act. Section 19(a) of the 1940 Act requires the payment of any dividend, or a distribution in the nature of a dividend payment, to be accompanied by a written statement (“Section 19(a) Notice”) which adequately discloses the source(s) of the payment if itis made from any source other than accumulated undistributed net income. Rule 19a-1(a) under the 1940 Act requires a Section 19(a) Notice to be on a separate piece of paper, and to clearly indicate what portion of the payment is from: (1) net income, (2) net profits from the sale of securities or other properties, and/or (3) paid-in surplus or any other capital source. The purpose of Section 19(a) and Rule 19a-1 is to protect shareholders from mistaking a return of capital for investment income.

The ICI’s proposal would amend Rule 19a-1 to permit funds to satisfy the above disclosure requirements by including the requisite information on their (or an affiliate’s) website within a reasonable amount of time after a distribution, and additionally transmitting the required information to beneficial shareholders no less frequently than quarterly in account statements or other written communications.

In addition, the ICI’s proposal recommends clarifying Rule 19a-1 to prescribe the accounting treatment for calculating the sources of fund distributions. The ICI proposal asserted that a fund’s distributions generally should be treated as arising: (1) first, from net investment income, (2) then, all capital gains (both short-term and long-term, as well as foreign currency gains, passive foreign investment company (“PFIC”) mark-to-market income or capital, and other amounts required under the tax laws), and (3) last, as a non-taxable return of capital. The ICI proposal also requested that Rule 19a-1(e) be amended to clarify that any revision to amounts previously reported pursuant to a Section 19(a) Notice be calculated on a cumulative basis (i.e. year-to-date). The proposed amendment would omit any requirement to send an amended Section 19(a) notice to any shareholder who had redeemed all shares of the fund.

Finally, the ICI’s proposal seeks to provide an exception from Section 19(a) Notice reporting for de minimis amounts of capital gain or return of capital. The ICI’s proposal seeks to amend Rule 19a-1 to eliminate any reporting requirement for a distribution if the total amount of the distribution (less the amount of net income) does not exceed the greater of (i) ten percent of the total amount of the distribution (calculated as a percentage of the fund’s cumulative year-to-date distributions) or (ii) one penny per share.

ICI Letter dated June 13, 2007 addressed to Robert Plaze, Associate Director of SEC’s Division of Investment Management Re: “Recommendations Regarding Amendments to Rule 19a-1.”


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 Publishes New “ComplianceAlert” Letters to Help Firms Identify Deficiencies and Improve Compliance Programs

June 22, 2007 8:46 AM

On June 14, 2007, the SEC published its first “ComplianceAlert” letter to assist Chief Compliance Officers of SEC-registered firms learn more about typical deficiencies and weaknesses that SEC examiners are uncovering during examinations. Lori Richards, director of the Office of Compliance Inspections and Examinations, stated in the press release published by the SEC that “[the SEC’s] goal is to alert firms to areas of compliance weakness so that they can take steps to proactively address any problems.”

The first ComplianceAlert letter, which is available on the SEC’s website, summarizes select areas that SEC examiners recently have reviewed during examinations, describes issues that were found, and encourages firms to review compliance in these areas and implement improvements as appropriate. The SEC’s first ComplianceAlert highlights deficiencies in recent examinations relating to closed-end fund distributions, performance advertising deficiencies, mutual funds’ “as of” transaction practices, and investment advisers’ disaster recovery plans. The ComplianceAlert also highlights broker-dealer deficiencies relating to the sales of Section 529 college savings plans, collateralized mortgage obligations, and real estate investment trusts. The SEC intends to issue additional ComplianceAlert letters on the SEC website in the future.

The SEC’s ComplianceAlert can be obtained at: http://www.sec.gov/about/offices/ocie/complialert.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 Hosts Rule 12b-1 Roundtable Discussion

June 22, 2007 8:38 AM

On Tuesday, June 19, 2007, the SEC held a roundtable discussion on the historical development of and current uses for Rule 12b-1 fees, in an effort to consider options for the reform of Rule 12b-1 under the Investment Company Act of 1940 (the “1940 Act”). The SEC adopted Rule 12b-1 in 1980, following a period when mutual funds had been experiencing significant net redemptions. Rule 12b-1 was intended to stimulate fund growth, promote a more stable fund asset base, and create economies of scale that would reduce shareholder expenses. After the adoption of Rule 12b-1, the SEC undertook several regulatory initiatives that allowed funds to use Rule 12b-1 for other purposes. According to Chairman Cox, the use of Rule 12b-1 fees has deviated from their original purposes of covering a fund’s advertising and distribution costs and is now often used as a substitute for initial commissions or sales fees or to pay administrative expenses. As a result, Chairman Cox requested a thorough reevaluation of Rule 12b-1 fees.

During the roundtable discussion, most panelists agreed that Rule 12b-1 reform requires, at a minimum, improved disclosure and transparency. Panelists noted that referring to these types of expenses generally as “Rule 12b-1 fees” is confusing because it does not help investors understand the actual types of expenses. One panelist explained that, because widely different types of activities are funded under Rule 12b-1, the use of “Rule 12b-1 fees” as an overall category tends to obscure important distinctions between the various expenses (e.g., investment management, distribution and general administrative expenses). Another panelist emphasized that, because there is already too much disclosure that investors neither read nor understand, Rule 12b-1 reform efforts should require clearer disclosure rather than more disclosure.

A number of panelists argued that, although Rule 12b-1 could be updated (e.g., updating of the factors mutual fund directors consider and/or improved disclosure and transparency), Rule 12b-1 has been an effective and simple means of packaging professional money management services through funds, and, therefore, does not need wholesale reform. In response to one panelist’s argument that the additional Rule 12b-1 fees typically charged for Class B and Class C shares should be externalized, panelists opposing wholesale reform responded that externalization could create operational issues, increase taxes for fund investors, lead to higher prices for the types of services currently paid for out of the Rule 12b-1 fee and limit the availability of advice. These panelists cautioned the SEC to be careful before significantly changing a system that, in their view, currently works effectively on behalf of fund shareholders.

After hosting the roundtable discussion, Chairman Cox emphasized the importance of ensuring that sales loads and similar types of fees are not disguised as Rule 12b-1 fees. Chairman Cox stated that the SEC will probably propose rules on this topic within a few months.

A list of participants, agenda items and public comments in connection with the Rule 12b-1 roundtable discussion is available at http://www.sec.gov/spotlight/rule12b-1.htm. See also, Reuters article dated June 19, 2007, “U.S. SEC sees more mutual fund disclosures.”


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.

Investors in Defunct Hedge Fund Sue Prime Broker; Hedge Fund Founder Pleads Guilty to Securities Fraud

June 15, 2007 9:39 AM

In a lawsuit filed in New York State court, investors in a hedge fund that collapsed in 2005 have charged that the fund’s prime broker fraudulently earned more than $100 million by misusing knowledge of the fund’s trades. The investors allege that while acting as the prime broker and custodian for all of the fund’s stock trades from late 2004 to summer 2005, the prime broker was also a market maker, or dealer, in the stock of a telecom-equipment maker in which the hedge fund had invested 80% of its assets. The lawsuit alleges that the prime broker’s two roles were “dual and conflicting.”

In February 2007, federal prosecutors in Manhattan charged the fund’s manager and founder with criminal fraud for breaking a promise that the hedge fund would invest no more than 10% of the fund’s assets in the stock of any one company. The fund’s manager allegedly caused the fund to invest as much as 80% of the fund’s assets in a telecom-equipment maker company, which was well in excess of the 10% diversification limit. The stock’s price initially soared and then nose-dived in 2005, causing the collapse of the fund.

In a related case, federal prosecutors announced on May 30, 207 that the former hedge fund manager and founder has pleaded guilty to charges of carrying out a securities fraud scheme that resulted in the collapse of the hedge fund and some $88 million in investor losses. As part of his guilty plea, the manager agreed to forfeit to the United States the sum of $5,535,571. The manager pleaded guilty to one count of securities fraud, as well as to two counts of failing to file a required beneficial-interest report with the SEC. On each count, he faces a maximum sentence of 20 years' imprisonment and a maximum fine equal to the greater of $5 million or twice the gross gain or loss resulting from the crime and is scheduled to be sentenced on October 15, 2007. The Manager has also settled a civil enforcement action with the SEC, but the details of the settlement have not yet been announced.

Wall Street Journal, “Lawsuit Against UBS Spotlights Prime Brokers,” May 23, 200. See Also Securities Law Daily “Hedge Fund Manager Pleads Guilty to Fraud Scheme worth $88 Million” May 30, 2007 available at: http://ippubs.bna.com/ip/BNA/SLD.NSF/0766b2875010f5e485256b57005d0605/4b0ef35bfe8b3f0f852572ec0083b276?OpenDocument.


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.

Senator Proposes Legislation that Would Authorize the SEC to Require Hedge Fund Advisers to Register

June 15, 2007 9:31 AM

On May 15, 2007, Sen. Charles Grassley (R-Iowa) introduced legislation that would authorize the Securities and Exchange Commission to compel most hedge fund advisers to register with the SEC under the Advisers Act. The bill, titled the “Hedge Fund Registration Act” would authorize the SEC to require all investment advisers, including hedge fund managers, to register with the SEC unless the adviser:

    • manages less than $50 million;
    • has fewer than fifteen clients;
    • does not hold himself out to the public as an investment adviser; and
    • manages assets for fewer than fifteen investors, regardless of whether the investments are direct or through a pooled investment vehicle.

In his floor remarks while introducing the legislation, Senator Grassley stated that Congress needed to act as a result of the D.C. Circuit Court of Appeals decision in Goldstein vs. SEC, which overturned a regulation imposed by the Securities and Exchange Commission requiring hedge fund advisers to register under the Advisers Act.

Press Release: Sen. Grassley Introduces The Hedge Fund Registration Act Of 2007-05-15 available at: http://grassley.senate.gov/index.cfm?FuseAction=PressReleases.Detail&PressRelease_id=5382&Month=5&Year=2007. See also The Hedge Fund Registration Act of 2007-05-15, available at: http://grassley.senate.gov/releases/2007/05152007.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.

Firm Agrees to Pay $25M, Settling Allegations It Overreported Results

June 15, 2007 9:28 AM

On May 23, 2007 a financial products and support services firm agreed, without admitting or denying any violations, to pay approximately $25 million to settle Securities and Exchange Commission charges that the firm overstated its financial results, violating federal securities law financial reporting, books-and-records, and internal control provisions. In a same-day statement, the SEC said that from mid-2000 through 2003, former officers and employees of the firm “engaged in a variety of improper accounting practices” that resulted in an estimated $180 million overstatement of the firm’s reported financial results for fiscal years that ended in June 2001, 2002, and 2003.

Press Release available at: http://www.sec.gov/news/press/2007/2007-100.htm. See also Litigation Release, “SEC v. The BISYS Group, Inc.,” 07-Civ-4010 (05/23/2007) http://www.sec.gov/litigation/litreleases/2007/lr20125.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 Commissioner Confirms Plans to Change Reproposed Mutual Fund Governance Rule But Offers No Details

June 15, 2007 9:24 AM

On May 15, 2007, while appearing on a panel at the American Enterprise Institute on the role of competition analysis in regulatory decisions, SEC Commissioner Paul Atkins confirmed that the SEC plans to revise the reproposed mutual fund governance rule, but declined to say how. The original rule would have required mutual funds, as a condition of certain exemptions, to have an independent chair and a board of three-fourths independent directors. However the rule was twice struck down by the U.S. Court of Appeals for the District of Columbia Circuit. On June 21, 2005, in the case U.S. Chamber of Commerce v. Securities Exchange Commission, the U.S. Court of Appeals stuck down the rule after finding that the SEC violated the Administrative Procedures Act by failing to consider adequately the rule’s costs and one alternative approach.

After the SEC reproposed the rule on June 29, 2005, the rule was struck down a second time on April 7, 2006, based in part on a finding by the U.S. Court of Appeals that the SEC had relied on cost data not in the rulemaking record.

In its semiannual regulatory agenda, published April 30, 2007, the SEC had indicated that it intended to repropose its mutual fund governance rule this summer. On his panel presentation, Commissioner Atkins noted that if the reproposal was not different from the original rule he would not be able to support it. The AEI panel also offered Commissioner Atkins the opportunity to reiterate his previously expressed opinion that the fund governance rule, as twice adopted, and Regulation NMS, on the national market system, were “regulatory missteps.” Concerning the fund governance rule, Commissioner Atkins noted that the SEC “tried to mandate a corporate governance structure for an entire industry” and that “economic studies show that there is no evidence that an optimal fund governance structure exists.”

http://pubs.bna.com/nwsstnd/ip/BNA/SRLR.NSF/0e00a637...5d0cf6/77ff7dba3dac4257852572df007551b3?OpenDocument


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.

Staff Provides Guidance Regarding Disclosure of Fund of Funds Expenses

June 15, 2007 9:22 AM

On May 23, 2007, the Staff of the Division of Investment Management released a series of responses to certain questions raised in connection with amendments to the fee table adopted by the SEC in the Fund of Funds release in June 2006. These amendments require funds to disclose in their fee tables the expenses of investing in other funds under a line item titled “Acquired Fund Fees and Expenses.” The questions and responses referenced Item 3 of Form N-1A, but also apply to similar Items in Forms N-2 and N-3.

The Guidance is available at: http://www.sec.gov/divisions/investment/guidance/fundfundfaq.htm. See also, “Fund of Funds Investments”, Investment Company Act Release No. 27399 (June 20, 2006), available at: http://www.sec.gov/rules/final/2006/33-8713.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 Announces Roundtable Discussion Regarding Rule 12b-1

June 15, 2007 9:17 AM

On May 29, 2007, the SEC announced that it will host a roundtable discussion on June 19, 2007 regarding Rule 12b-1 under the Investment Company Act of 1940, as amended (the “1940 Act”). Rule 12b-1 permits mutual funds to use fund assets to finance the distribution of their shares.

The roundtable will consist of panels addressing:

    • the historical circumstances that led to the promulgation of Rule 12b-1, and the original intended purpose of the rule;

    • the evolution of the uses of Rule 12b-1 and the rule’s current role in fund distribution practices;

    • the costs and benefits of the current use of Rule 12b-1; and

    • the options for reform or rescission of Rule 12b-1.

While announcing the roundtable panel, SEC Chairman Cox noted that when Rule 12b-1 was initially adopted, 12b-1 fees were intended to be a temporary solution to address specific distribution problems, as they arose. However, Chairman Cox noted that the current use of 12b-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation. Chairman Cox further noted that the roundtable will assist the SEC in reviewing the current uses of 12b-1 fees, how those fees impact retail investors, and the interests and concerns of independent directors, who must approve 12b-1 plans. In addition, the roundtable can also assist in identifying and evaluating possibilities for reforming Rule 12b-1.

The Press Release is available at http://www.sec.gov/news/press/2007/2007-106.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 Proposes New Regulation D Offering Exemption

June 15, 2007 9:00 AM

On May 23, 2007 a financial products and support services firm agreed, without admitting or denying any violations, to pay approximately $25 million to settle Securities and Exchange Commission charges that the firm overstated its financial results, violating federal securities law financial reporting, books-and-records, and internal control provisions. In a same-day statement, the SEC said that from mid-2000 through 2003, former officers and employees of the firm “engaged in a variety of improper accounting practices” that resulted in an estimated $180 million overstatement of the firm’s reported financial results for fiscal years that ended in June 2001, 2002, and 2003.

Press Release available at: http://www.sec.gov/news/press/2007/2007-100.htm. See also Litigation Release, “SEC v. The BISYS Group, Inc.,” 07-Civ-4010 (05/23/2007) http://www.sec.gov/litigation/litreleases/2007/lr20125.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 Will Not Seek Rehearing In D.C. Circuit Case Vacating Fee-based Broker Rule

June 15, 2007 8:58 AM

On May, 14, 2007, the SEC announced that it would not seek further review of the March 30, 2007 ruling of the U.S. Court of Appeals for the District of Columbia Circuit in Financial Planning Association v. SEC (the “March 30 Decision”). In the March 30 Decision, the D.C. Circuit concluded that the SEC exceeded its authority in promulgating a rule that exempted broker-dealers that provide investment advice to clients with fee-based accounts from the registration requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

The SEC also indicated that it would ask the court to grant a 120-day stay of the March 30 Decision, which was to have taken effect May 21, 2007, in order to give investors and brokers time to respond. The SEC will also consider whether further rulemaking or interpretations are necessary regarding the application of the Advisers Act to these fee-based accounts and other issues arising as a result of the March 30 Decision.

The SEC further notes that it intends to work with individual brokerage firms during the transition period as they respond to the March 30 Decision. The SEC’s stated goal is to provide customers of the brokerage firms with the information and time needed to determine the appropriate form of securities services that they require.

While announcing the SEC’s intentions, Chairman Cox also noted that he has approved additional emergency funding to accelerate an on-going outside study of the marketing, sale, and delivery of financial products and services to investors in this area. Chairman Cox mentioned that the previously-commissioned study, by the RAND Corporation, will now be delivered to the SEC no later than December 2007, several months ahead of its original scheduled date. The results of the study are expected to provide an important empirical foundation for considering improvements in regulatory and legislative rules that date back to the 1930s.

The Press Release is available at http://www.sec.gov/news/press/2007/2007-95.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.