Investment Management Industry News Summary - March 2001

Investment Management Industry News Summary - March 2001

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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Paul Roye reports on regulatory review under the Investment Advisers Act

March 30, 2001 12:06 PM

In a speech at the third annual IA Compliance Summit in Washington, D.C., Mr. Roye reviewed the current projects underway in the Division. According to Mr. Roye, the SEC’s Division of Investment Management is revisiting its regulatory approach to many issues that arise under the Investment Advisers Act of 1940, as amended. The Division hopes to modernize the regulations to reflect changes in the investment advisory industry.

Mr. Roye said the Office of Compliance Inspections and Examinations ("OCIE") is currently conducting a sweep of Internet advisers to monitor their compliance with the federal securities laws. The inspections will assist the staff in determining whether these programs are providing individualized advice and whether they are operating outside of rule 3a-4 under the Investment Company Act of 1940 (the "1940 Act").

Mr. Roye also pointed to a miniboom in hedge fund fraud. Some hedge fund operators have mistakenly concluded that they are beyond the SEC’s reach because they are not subject to the SEC’s registration and reporting requirements, he said. Hedge funds are subject to the antifraud provisions, however, and the SEC has brought a number of cases against unrelated funds.

Mr. Roye stated that mutual fund managers and investment advisers are increasingly sponsoring and advising hedge funds. These services raise potential conflicts of interest which OCIE is monitoring during its inspections. The conflicts may result from the differing fee structures of hedge funds and mutual funds, which may tempt an adviser to favor the hedge fund over the mutual fund when allocating trades. Mr. Roye said the staff expects firms to have compliance procedures in place to address potential conflicts of interest.

Among the Division’s top priorities are the Investment Adviser Registration Depository ("IARD") and revisions to Form ADV. Mr. Roye said that the IARD has successfully completed two months of operations and has received positive responses. The staff continues to analyze the comments on part 2 of Form ADV and is working to finalize the form.

The Division is also working on a rule proposal to allow certain types of principal transactions. Mr. Roye said this initiative is also among the Division’s top priorities. Another priority is a recommendation of a final rule that would exempt certain broker-dealers from the definition of "investment adviser." Mr. Roye said the final rule will likely include more specific disclosure about the nature of the accounts.

Mr. Roye would like to see a revision to the current rule governing adviser advertising. Rather than continue the current "laundry list" of prohibited practices, Mr. Roye would prefer a rule that mirrors the antifraud standard of rule 156 of the 1933 Act, which governs investment company advertising. He said this approach would eliminate inconsistent regulatory treatment of advertising practices by investment advisers as compared to other financial services providers.

According to Mr. Roye, updating the investment adviser books and records rules is a priority. He also believes that the custody rule should be revised. In addition, the staff is also considering the following issues:

  • whether to adopt an investment adviser code of ethics requirement,
  • whether additional guidance is needed with regard to soft dollars and best execution and
  • whether additional guidance is needed regarding certain statutory exclusions from the definition of adviser.

Mr. Roye reported that the adoption of any final rule regarding pay-to-play practices in the investment adviser industry will await the appointment of a new SEC chairman. Meanwhile, he urged all firms to voluntarily adopt the best practice guidelines established by the Investment Counsel Association of America. SEC Today, March 30, 2001.

 
 



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.

Paul Roye reports on regulatory review under the Investment Advisers Act

March 30, 2001 9:11 AM

In a speech at the third annual IA Compliance Summit in Washington, D.C., Mr. Roye reviewed the current projects underway in the Division. According to Mr. Roye, the SEC’s Division of Investment Management is revisiting its regulatory approach to many issues that arise under the Investment Advisers Act of 1940, as amended. The Division hopes to modernize the regulations to reflect changes in the investment advisory industry.

Mr. Roye said the Office of Compliance Inspections and Examinations ("OCIE") is currently conducting a sweep of Internet advisers to monitor their compliance with the federal securities laws. The inspections will assist the staff in determining whether these programs are providing individualized advice and whether they are operating outside of rule 3a-4 under the Investment Company Act of 1940 (the "1940 Act").

Mr. Roye also pointed to a miniboom in hedge fund fraud. Some hedge fund operators have mistakenly concluded that they are beyond the SEC’s reach because they are not subject to the SEC's registration and reporting requirements, he said. Hedge funds are subject to the antifraud provisions, however, and the SEC has brought a number of cases against unrelated funds.

Mr. Roye stated that mutual fund managers and investment advisers are increasingly sponsoring and advising hedge funds. These services raise potential conflicts of interest which OCIE is monitoring during its inspections. The conflicts may result from the differing fee structures of hedge funds and mutual funds, which may tempt an adviser to favor the hedge fund over the mutual fund when allocating trades. Mr. Roye said the staff expects firms to have compliance procedures in place to address potential conflicts of interest.

Among the Division’s top priorities are the Investment Adviser Registration Depository ("IARD") and revisions to Form ADV. Mr. Roye said that the IARD has successfully completed two months of operations and has received positive responses. The staff continues to analyze the comments on part 2 of Form ADV and is working to finalize the form.

The Division is also working on a rule proposal to allow certain types of principal transactions. Mr. Roye said this initiative is also among the Division's top priorities. Another priority is a recommendation of a final rule that would exempt certain broker-dealers from the definition of "investment adviser." Mr. Roye said the final rule will likely include more specific disclosure about the nature of the accounts.

Mr. Roye would like to see a revision to the current rule governing adviser advertising. Rather than continue the current "laundry list" of prohibited practices, Mr. Roye would prefer a rule that mirrors the antifraud standard of rule 156 of the 1933 Act, which governs investment company advertising. He said this approach would eliminate inconsistent regulatory treatment of advertising practices by investment advisers as compared to other financial services providers.

According to Mr. Roye, updating the investment adviser books and records rules is a priority. He also believes that the custody rule should be revised. In addition, the staff is also considering the following issues:

  • whether to adopt an investment adviser code of ethics requirement,
  • whether additional guidance is needed with regard to soft dollars and best execution and
  • whether additional guidance is needed regarding certain statutory exclusions from the definition of adviser.

Mr. Roye reported that the adoption of any final rule regarding pay-to-play practices in the investment adviser industry will await the appointment of a new SEC chairman. Meanwhile, he urged all firms to voluntarily adopt the best practice guidelines established by the Investment Counsel Association of America. SEC Today, March 30, 2001.

 

 
 



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.

Paul Roye reviews initiatives pending in Division of Investment Management

March 27, 2001 8:54 AM

On March 19, 2001 at a conference in Palm Desert, California, Paul Roye, the director of the Division of Investment Management (the "Division"), reviewed the unfinished business on the Division's agenda. Mr. Roye said that although the SEC is awaiting the arrival of a new chairman before taking on new initiatives, the staff hopes to continue work on:

  • improving shareholder communications,
  • providing more flexibility for affiliated transactions and
  • revising the rules governing fund advertising in the next year.

Mr. Roye noted that the management discussion and analysis section of shareholder reports could be improved and should be mandated. The staff is currently looking at the disclosure of fund portfolio holdings, an issue on which the Division has received several rulemaking petitions.

The Investment Company Institute ("ICI") submitted a number of recommendations for rule changes related to the affiliated transactions area. According to Mr. Roye, the staff has tried to provide flexibility in this area through no-action and interpretive letters. The staff is also working on a rule that would codify exemptive relief to permit funds to invest cash in affiliated money market funds. With respect to some of ICI's other suggestions, Mr. Roye said only a few exemptive applications have been received, so there appears to be no pressing need for rulemaking.

The staff anticipates that it will recommend a proposal to amend rule 482 of the Securities Act of 1933 (the "1933 Act"), which regulates investment company advertising, so that funds may provide more timely information in their advertising. The proposal would eliminate the need to include the advertisement information in the statutory prospectus, according to Mr. Roye. Prior to the rulemaking initiative, the staff intends to publish a staff legal bulletin to remind funds that their advertisements must not be misleading and that mere compliance with rule 482 is not the end of the analysis.

Mr. Roye also announced that the staff is working on a concept release on actively managed exchange traded funds. The goal of the release is to examine the differing perspectives on the issues surrounding such funds. According to Mr. Roye, this information will assist the staff during the exemptive process when it evaluates proposals for these types of products.

The staff is also analyzing Web-based baskets of securities, which the ICI maintains are products offered by unregistered investment companies. Mr. Roye said the staff wants to ensure that these products are appropriately regulated. He added that the fact that a product competes directly with mutual funds is not a sufficient reason to regulate it as a mutual fund. The staff will consider the legal issue of whether the products constitute the creation of new securities which result in the creation of an investment company under the federal securities laws. SEC Today, March 27, 2001.

 

 
 



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 to Expand Electronic Recordkeeping

March 22, 2001 1:31 PM

SEC Proposes Rule Amendments to Expand Electronic Recordkeeping

Click here for the full version.

 
 



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

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

CFTC issues proposed privacy regulations implementing notice requirements and restrictions on financial institutions subject to its jurisdiction

March 19, 2001 12:34 PM

On March 12, 2001, as required by the Commodity Futures Modernization Act of 2000 (the "CFMA"), the Commodity Futures Trading Commission (the "CFTC") issued proposed privacy regulations implementing notice requirements and restrictions on the ability of financial institutions subject to its jurisdiction to disclose nonpublic personal information about consumers to nonaffiliated third parties.

The CFMA provides that the Commission shall be treated as the federal functional regulator within the meaning of Title V of the Gramm-Leach-Bliley Act and that futures commission merchants, commodity trading advisors, commodity pool operators and introducing brokers subject to the CFTC’s jurisdiction shall be treated as financial institutions within the meaning of Title V. Section 5g of the Commodity Exchange Act, as amended by the CFMA, directs the CFTC to prescribe regulations under Title V to limit the instances in which a financial institution may disclose nonpublic personal information about a consumer to nonaffiliated third parties and to require financial institutions to disclose to its consumers its privacy policies and practices with respect to information sharing with both affiliates and nonaffiliated third parties. Commodity Futures Trading Commission, Weekly Advisory, March 19, 2001.

 
 



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.

NASDR issues policy statement regarding general suitability rule 2310 and online communications

March 19, 2001 12:14 PM

In light of the dramatic increase in the use of the Internet for communication between brokers/dealers and their customers, NASDR issued a policy statement on March 19, 2001 to provide members with guidance concerning their obligations under the National Association of Securities Dealers, Inc. ("NASD") general suitability rule, rule 2310, in the current electronic environment.

The policy statement briefly discusses some of the issues created by the intersection of online activity and the suitability rule. The policy statement then provides examples of electronic communications that NASDR considers to be either within or outside the definition of "recommendation" for purposes of the suitability rule. In addition, the policy statement sets forth guidelines to assist members in evaluating whether a particular communication could be viewed as a "recommendation," thereby triggering application of the suitability rule.

NASDR emphasizes, however, that this current policy statement does not

  • alter member obligations under the suitability rule or
  • establish a "bright line" test for determining whether a communication does or does not constitute a "recommendation" for purposes of the suitability rule.

The policy statement emphasizes that no single factor discussed below, standing alone, necessarily dictates the outcome of the analysis.

There has been much debate recently about the application of the suitability rule to online activities. Two major questions have arisen: first, whether the current suitability rule should even apply to online activities, and, second, if so, what types of online communications constitute "recommendations" for purposes of the rule.

In answer to the first question, NASDR believes that the suitability rule applies to all "recommendations" made by members to customers—including those made via electronic means—to purchase, sell, or exchange a security. Electronic communications from broker/dealers to their customers clearly can constitute "recommendations." The suitability rule, therefore, remains fully applicable to online activities in those cases where the member "recommends" securities to its customers.

With regard to the second question, NASDR does not seek to identify in this policy statement all of the types of electronic communications that may constitute "recommendations." As NASDR has often emphasized, the test for determining whether any communication (electronic or traditional) constitutes a "recommendation" remains a "facts and circumstances" inquiry to be conducted on a case-by-case basis.

NASDR also recognizes that many forms of electronic communications defy easy characterization. The policy statement emphasizes that the determination of whether a communication is a "recommendation" depends on the content, context and presentation of the particular communication or set of communications. An important factor in this regard is whether—given its content, context, and manner of presentation—a particular communication from a broker/dealer to a customer reasonably would be viewed as a "call to action" or suggestion that the customer engage in a securities transaction. Members should bear in mind that an analysis of the content, context and manner of presentation of a communication requires examination of the underlying substantive information transmitted to the customer and consideration of any other facts and circumstances, such as any accompanying explanatory message from the broker/dealer. Another principle that members should keep in mind is that, in general, the more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a "recommendation." NASD Notice to Members 01-23, April 2001.

 

 
 



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.

Paul Roye reviews initiatives pending in Division of Investment Management

March 19, 2001 11:59 AM

On March 19, 2001 at a conference in Palm Desert, California, Paul Roye, the director of the Division of Investment Management (the "Division"), reviewed the unfinished business on the Division's agenda. Mr. Roye said that although the SEC is awaiting the arrival of a new chairman before taking on new initiatives, the staff hopes to continue work on:

  • improving shareholder communications,
  • providing more flexibility for affiliated transactions and
  • revising the rules governing fund advertising in the next year.

Mr. Roye noted that the management discussion and analysis section of shareholder reports could be improved and should be mandated. The staff is currently looking at the disclosure of fund portfolio holdings, an issue on which the Division has received several rulemaking petitions.

The Investment Company Institute ("ICI") submitted a number of recommendations for rule changes related to the affiliated transactions area. According to Mr. Roye, the staff has tried to provide flexibility in this area through no-action and interpretive letters. The staff is also working on a rule that would codify exemptive relief to permit funds to invest cash in affiliated money market funds. With respect to some of ICI's other suggestions, Mr. Roye said only a few exemptive applications have been received, so there appears to be no pressing need for rulemaking.

The staff anticipates that it will recommend a proposal to amend rule 482 of the Securities Act of 1933 (the "1933 Act"), which regulates investment company advertising, so that funds may provide more timely information in their advertising. The proposal would eliminate the need to include the advertisement information in the statutory prospectus, according to Mr. Roye. Prior to the rulemaking initiative, the staff intends to publish a staff legal bulletin to remind funds that their advertisements must not be misleading and that mere compliance with rule 482 is not the end of the analysis.

Mr. Roye also announced that the staff is working on a concept release on actively managed exchange traded funds. The goal of the release is to examine the differing perspectives on the issues surrounding such funds. According to Mr. Roye, this information will assist the staff during the exemptive process when it evaluates proposals for these types of products.

The staff is also analyzing web-based baskets of securities, which the ICI maintains are products offered by unregistered investment companies. Mr. Roye said the staff wants to ensure that these products are appropriately regulated. He added that the fact that a product competes directly with mutual funds is not a sufficient reason to regulate it as a mutual fund. The staff will consider the legal issue of whether the products constitute the creation of new securities which result in the creation of an investment company under the federal securities laws. SEC Today, March 27, 2001.

 
 



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 hurries guidance on calculating fund fees

March 18, 2001 12:22 PM

On March 12, 2001 the SEC issued guidance to investment company issuers to keep them from making the mistake of over-paying rule 24f-2 registration fees on their securities. The guidance took the form of technical amendments to instructions for Registration Form 24F-2 under the Investment Company Act of 1940 (the "Investment Company Act").

The calculation filers must use in determining the fee, Instruction C.9, changes whenever Congress passes legislation changing the level of SEC registration fees. The SEC noted that although the Form was updated when rates changed filers with older copies of the form were making filings with incorrect fees, sometimes overpaying. The technical amendments direct filers to the latest fee advisory on the SEC’s web siteto locate the correct fee to use.

The guidance also instructs issuers they must pay interest on registration fees that are not filed on time. The amendments are needed now according to the SEC because late winter and early spring is the peak time for registration of investment company securities.

Form 24F-2 must be filed within 90 calendar days after the end of an issuer’s fiscal year. Many issuers’ fiscal years coincide with the calendar year, making their forms due by April 2, the first business day following the 90-day period. Fund Action, March 18, 2001.

 
 



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 National Association of Securities Dealers Regulation, Inc. ("NASDR") rule changes relating to cash and margin treatment for certain types of option positions

March 16, 2001 12:44 PM

On November 17, 2000, the SEC approved amendments to NASDR rules 2520 and 2522, relating to margin requirements for certain option positions (the "amendments"). The amendments:

  • define specific terms relating to the amendments including "box spread," "butterfly spread," and "escrow agreement."
  • expand the types of short option positions that would be considered "covered" and eligible for cash accounts to include short positions that are components of certain limited risk spread strategies (box spreads, butterfly spreads, and debit and credit spreads), provided that any potential risk to the carrying broker/dealer is paid for in full and retained in the account;
  • reduce the required margin for butterfly and box spreads by recognizing butterfly and box spreads as strategies (rather than separate transactions) for purposes of margin treatment;
  • permit the extension of credit on certain long box spreads;
  • recognize various hedging strategies involving stocks (or other underlying instruments) paired with long options, and reduce the required maintenance margin on such hedged stock positions;
  • permit the extension of credit on certain long-term options and warrants with over nine months until expiration; and
  • revise the minimum margin requirement for short uncovered put options.

Butterfly spreads, box spreads, and other spreads. The amendments make butterfly and box spreads in cash-settled, European-style options eligible for cash accounts. The amendments also reduce the required margin for butterfly and box spreads by recognizing butterfly and box spreads as strategies (rather than separate transactions) for purposes of margin treatment. In addition, the amendments permit the extension of credit on certain long box spreads.

Extension of credit on long-term options and warrants. The amendments permit extensions of credit on certain long listed and over-the-counter ("OTC") options and warrant products (i.e., stock index warrants, but not traditional stock warrants issued by a corporation on its own stock). Only those options or warrants with expirations exceeding nine months ("long-term") are eligible for credit extension. The amendments, however, do not provide loan value for foreign currency options.

Maintenance margin requirements for stock positions held with options positions. The amendments recognize and establish reduced maintenance margin requirements for five options strategies that are designed to limit the risk of a position in the underlying component. The strategies and their respective margin requirements are: 

Long Put/Long Stock - a hedging strategy that requires an investor to carry in an account a long position in the component underlying the put option, and a long put option specifying equivalent units of the underlying component. The maintenance margin requirement for the long put/long stock combination would be the lesser of: 

  • 10 percent of the put option aggregate exercise price, plus 100 percent of any amount by which the put option is out-of-the-money; or
  • 25 percent of the current market value of the long stock position.

Long Call/Short Stock - a hedging strategy that requires an investor to carry in an account a short position in the component underlying the call option, and a long call option specifying the equivalent units of the underlying component. For a long call/short stock combination, the maintenance margin requirement would be the lesser of:

  • 10 percent of the call option aggregate exercise price, plus 100 percent of any amount by which the call option is out-of-the-money; or
  • the maintenance margin requirement on the short stock position as specified in NASD Rule 2520(c).

Conversion - a long stock position in conjunction with a long put and a short call of which the long put and short call have the same expiration and exercise price. The maintenance margin requirement for a conversion would be 10 percent of the aggregate exercise price.

Reverse Conversion - a short stock position held in conjunction with a short put and a long call of which the short put and the long call have the same expiration and exercise price. The maintenance margin requirement for a reverse conversion would be 10 percent of the aggregate exercise price, plus any in-the-money amount (i.e., the amount by which the exercise price of the short put exceeds the current market value of the underlying stock position).

Collar - a long stock position held in conjunction with a long put and a short call where the exercise price of the long put is lower than the exercise price of the short call. The maintenance margin for a collar under the amendments would be the lesser of:

  • 10 percent of the long put aggregate exercise price, plus 100 percent of any amount by which the long put is out-of-the-money; or
  • 25 percent of the short call aggregate exercise price.

Margin Requirements For Short Put Options. Currently, the minimum required margin for a short listed put option is an amount equal to the option premium plus a percentage of the current value of the underlying instrument. The minimum required margin for a short OTC put option is an amount equal to a percentage of the current value of the underlying component. As a result, a margin requirement for a short put option is created even when the price of the underlying instrument rises above the exercise price of the put and the risk associated with the put option has decreased because the option is out-of-the money. Therefore, the amendments provide a minimum margin requirement for short put options more in line with the risk associated with the option. Specifically, under the amendments, the minimum margin requirement for a short listed put option will be an amount equal to the current value of the option plus a percentage of the option’s exercise price. The minimum margin required for a short OTC put option will be an amount equal to a specified percentage of the option’s exercise price. NASDR Notices to Members, January 25, 2001.

 

 
 



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 rules to accommodate electronic storage of funds and adviser records

March 15, 2001 12:26 PM

The SEC has proposed revisions to its Investment Company Act and Investment Advisers Act rules regarding the electronic storage of records (Rel. Nos. IC-24890, IA-1932, March 13, 2001). The revisions were prompted by the enactment of the Electronic Signatures in Global and National. Commerce Act which encourages federal government agencies to accommodate electronic recordkeeping.

The SEC’s proposal would expand the circumstances under which funds and advisers may keep their records on electronic storage media. The revisions will also clarify and update the recordkeeping rules.

The SEC’s current rules provide that funds and advisers may keep records on electronic storage media only if the records were originally created or received in electronic format. The SEC has granted no-action letters in the past to certain funds and advisers to permit them to convert their records into electronic formats and to retain them electronically. The proposed recordkeeping rules will incorporate those no-action letter positions while eliminating many of the conditions that apply to electronic archives of non-electronic original records.

Under the SEC’s proposal, the electronic storage of required books and records is not mandatory, but permissible for firms that find it cost-effective.

The SEC’s proposal would also clarify the obligation of funds and advisers to provide copies of their records to SEC examiners. The requirement to provide records promptly upon request would be defined as within one business day. Under its proposed rule, any printouts or copies must be legible and complete in the medium in which they are stored and access must be provided to search, view, sort and print the records.

If the proposed amendments are adopted, the SEC will interpret the Electronic Signatures Act as requiring funds and advisers to comply with Investment Company Act rule 31a-2 and Investment Advisers Act 204-2 when they keep electronic records.

Comments on the proposal must be received by the SEC on or before April 19, 2001. SEC Today, March 15, 2001.

 
 



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.

Advocacy group seeks hearing on adviser’s exemption application

March 14, 2001 12:20 PM

Fund Democracy, LLC ("Fund Democracy") has requested a hearing on an exemptive application filed by a fund (the "Fund") and its adviser (the "Adviser") (together, the "Applicants"). The Applicants seek exemptive relief that will permit the Adviser to enter into and materially amend subadvisory agreements without Fund shareholder approval. Fund Democracy maintains that, since the first "multimanager" exemptive order was granted in 1995, dozens of funds appear to be operating in violation of the conditions under which those exemptive orders were granted and that the conditions under which relief was granted are inadequate.

Many of the funds operating under such orders are "multimanager funds" in name only, according to Fund Democracy, but in fact employ only one subadviser for years. Further, the exemptive orders effectively permit the funds to raise the managers’ fees without shareholder approval. Fund Democracy submitted a memorandum in support of its request outlining the abuses of such exemptive orders.

The Applicants’ counsel urged the SEC to deny the request for a hearing. Counsel refuted each of the issues outlined by Fund Democracy, including the suggestion that the Adviser could raise its fees without a shareholder vote by reducing subadvisory fees. Counsel explained that the requested order is intended to improve the Fund’s operational efficiency and to reduce costs.

Fund Democracy replied that its hearing request and memorandum provide evidence that funds have operated in a manner contrary to the basis for which the relief was granted.

Fund Democracy noted that Institutional Shareholder Services agrees with its request for a hearing and has conveyed its views to the SEC. Last year, Fund Democracy and the Consumer Federation of America requested a hearing on the application by another fund and its adviser. They withdrew their request when those applicants agreed to conditions that addressed the issues they raised. Fund Democracy suggested that the Applicants could do the same. SEC Today, March 14, 2001.

 
 



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.

NASDR announces new automatic e-mail reminder feature in Web CRDSM

March 12, 2001 12:53 PM

NASDR announces a new feature in the Firm Notification section of Web CRDSM. Firms can now request an automatic e-mail reminder from Web CRD whenever a registered representative at the firm has 90 days remaining in his or her 120-day Regulatory Element requirement window. Firms request this e-mail reminder by logging on to the Firm notification section of Web CRD (see steps below) and selecting the 90-day CE notification option from the list of available e-mail notifications that Web CRD will send firms. Notification of persons with 90 days remaining in their Regulatory Element window provides firms with yet another tool to help them monitor their registered persons'compliance with Regulatory Element requirements. Firms are reminded to consult NASD Notice to Members 01-07 for a complete explanation of the CE Queues and other CE e-mail notifications available from Web CRD.

Firms are also reminded that the e-mail notifications that Web CRD sends to firms notifying them of registered persons who go inactive for failing to satisfy their Regulatory Element requirements within 120 days are not sent for new hires at the firm. To learn of new hires who are inactive, firms must view the queue Current Individual Deficiencies and select CE Inactive from the deficiencies list. NASDR Notices to Members, March 12, 2001.

 
 



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

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

SEC adopts technical amendments to the instructions to Form 24F-2

March 12, 2001 12:42 PM

The SEC has issued a release adopting technical amendments to the instructions to Form 24F-2, the form under the Investment Company of 1940 Act (the "1940 Act") that most investment companies use to calculate and pay registration fees on their shares. The technical amendments to the instructions explain more clearly where investment company issuers should look to find the correct rate to use in calculating registration fees, and the correct interest rate applicable to late payments of registration fees. The amendments will be effective March 12, 2001. SEC Today, March 12, 2001.

Banks protest lack of level playing field with funds on laundering

March 11, 2001 1:04 PM

Mutual funds are coming under increased scrutiny in connection with money laundering, because the banking industry believes that it is penalized unfairly by having to comply with anti-laundering regulations that do not apply to funds. According to Thomas McCool, the managing director for financial institutions at the GAO, banks and bank regulators believe that there is not a level playing field.

The Treasury Department and the SEC currently are working on a mandatory requirement that broker-dealers must report suspicious transactions, and there is talk that this could be followed by a similar requirement for funds. An official of the American Bankers Association said that, because all financial institutions could be subject to laundering attempts, it was bad public policy to lean on depository institutions and not the others.

GAO currently is reviewing anti-laundering requirements for financial institutions and considering what broker/dealers and funds do now to detect laundering. Mr. McCool said he was hoping by June 2001 to get the information to Senator Carl Levin (D-Mich.), who has been investigating money laundering.

GAO is evaluating responses to a sample survey it sent funds on this subject. Since mutual funds do not take cash from investors, those involved in money laundering would have to buy money orders to invest in them. One question to be answered, said Mr. McCool, is whether if a fund were to receive batches of small money orders, the fund would treat this as a suspicious transaction. Fund Action, March 11, 2001.

 
 



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 grants closed-end fund permission to charge a 4% redemption fee

March 11, 2001 12:36 PM

In an action that might set a precedent for other closed-end funds in the process of being open-ended, the SEC staff has allowed a closed-end fund to temporarily change a 4% redemption fee to deter arbitrageurs from profiting at the expense of other shareholders in the fund. This is the first such approval by the SEC, which otherwise has been holding funds to a redemption fee ceiling of 2%.

The SEC staff stated that it was granting no-action relief to the fund because it believed that the reorganization presented special circumstances that warranted a limited exception to the staff’s general position on redemption fees. The staff cited the threat of "substantial" sales of shares by arbitrageurs as well as potential redemptions by other investors. It also noted that the fund is a single-country emerging markets fund and, for that reason, would likely incur significant costs in selling large amounts of portfolio securities to meet the anticipated redemptions and exchanges from that fund to an affiliated fund.

The 4% redemption fee was only approved for a period of less than 120 days. The 4% number was based on calculations of the portfolio and administrative cost the fund would incur over the level of the proceeds from fees at the regular 2% level. Fund Action, March 11, 2001.

 
 



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 announcesESign related rulemaking

March 9, 2001 1:14 PM

On February 28, 2001, the SEC announced several upcoming rulemaking activities regarding recordkeeping requirements consistent with the Electronic Signatures in Global and National Commerce Act of 2000 (ESign). Under Section 107(b)(1)(B) of ESign, the record retention provisions will become effective on June 1, 2001.

Under the federal securities laws, certain regulated entities, including registered broker-dealers, transfer agents, investment companies, investment advisers and public utility holding companies, must keep certain records of their activities. The SEC currently permits these entities to maintain certain records electronically, subject to conditions designed to protect investors’ interests and the financial stability of the regulated entities. The SEC noted that ESign is intended to remove unnecessary impediments to the use of electronic records in commerce, while preserving the SEC’s ability to administer statutes necessary to protect investor interest. The SEC noted that it will provide interpretative guidance and, where appropriate, propose or adopt rules consistent with ESign.

Because ESign does not generally apply to information required to be filed with government agencies, the SEC also noted that it does not currently contemplate any changes to its existing filing rules as a result of ESign. SEC Today, February 28, 2001.

 
 



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

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

CFTC proposes rules implementing Commodity Futures Modernization Act of 2000

March 9, 2001 12:58 PM

The CFTC announced that it is proposing rules relating to trading facilities to implement the Commodity Futures Modernization Act of 2000 ("CFMA"). Congress, on December 15, 2000, passed, and former President Clinton, on December 21, 2000, signed into law, the CFMA, which substantially altered the Commodity Exchange Act. The CFMA amended the law to establish three categories of markets, designated contract markets, derivative transaction execution facilities and markets exempt from CFTC regulation. The three categories match the degree of regulation to the varying nature of the products and the nature of the participant having access to the market.

The proposed new rules and rule amendments are being published in the Federal Register for a 30-day comment period. The CFTC, in its Federal Register notice, urges commenters to submit their comments as early as possible during the comment period so that the statutory changes may be effectuated without delay. Commodity Futures Trading Commission, Weekly Advisory, March 9, 2001.

 
 



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 Paul Carey discusses mutual fund performance advertising

March 2, 2001 12:28 PM

On March 2, 2001, SEC Commissioner Paul R. Carey spoke at The "SEC Speaks" conference about his concerns regarding recent mutual fund performance advertising. Mr. Carey emphasized that technical compliance with rule 482 of the Securities Act of 1933 would not necessarily shield a mutual fund from running afoul of the antifraud rules. Noting the massive swings in the recent market, Mr. Carey stated that the mere compliance with rule 482 by using standardized total returns calculated as of the most recently completed calendar quarter would not necessarily mean that the advertisements, when taken as a whole, are not materially misleading. Mr. Carey pointed to the Van Kampen and Dreyfus cases as examples in which technical compliance with rule 482 did not protect the funds from being found to have violated the antifraud provisions of the federal securities laws.

Mr. Carey stated that the SEC was responding to these performance advertising concerns by: 

  • undertaking enforcement proceedings in appropriate cases,
  • cautioning the industry to be more judicious in advertising practices,
  • issuing investor bulletins designed to caution investors to take factors other than simply performance into account when considering fund investments,
  • drafting a legal bulletin (to be issued in the future) to remind fund companies that their advertisements should not mislead investors and that mere compliance with rule 482 is not necessarily sufficient to avoid misleading investors, and
  • drafting proposed rule amendments.

SEC Speaks, March 2, 2001

 

 
 



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 bill to reduce SEC fees and give pay parity to SEC employees

March 1, 2001 1:28 PM

On March 1, 2001, the Senate Banking Committee approved a bill to reduce SEC fees and to bring the pay of SEC employees in line with the higher pay schedules of other federal financial regulators. The bill cleared the committee on a voice vote after the panel adopted a technical amendment offered by committee Chairman Phil Gramm (R-Texas) and Sen. Chuck Schumer (D-N.Y.). Gramm and Schumer introduced the bill, the proposed "Competitive Markets Supervision Act," in late January (See Industry News Summary for the week of 1/19/01 – 1/26/01).

The Committee adopted a technical amendment to the original bill to adjust certain quantitative information to reflect revised Congressional Budget Office estimates of the amount investors would save through SEC fee reductions. The Committee estimated that the savings from the fee reductions for the first 10 years after the bill is effective will be $14 billion.

Senators supported the bill’s pay parity provisions as a method of attracting the "best people possible" to work at the SEC. These provisions are designed to lower the SEC’s high attrition rate, which was 13 percent in 1999.

The bill will reduce SEC registration, transaction, and merger/tender fees. Because of market fluctuations, the bill provides for a self-adjusting mechanism so that the fees collected by the SEC will always be sufficient to fund the agency. Currently, SEC user fees yield revenue of approximately $2.3 billion, roughly six times the SEC’s annual budget. Revenue exceeding the SEC’s budget becomes part of the U.S. Treasury’s general revenue and is used to fund other federal programs.

 
 



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 23 companies and individuals in cases involving broad spectrum of Internet securities fraud

March 1, 2001 1:17 PM

As a result of a nationwide Internet fraud sweep, the SEC announced 11 enforcement actions against 23 companies and individuals that it alleged used the Internet to defraud investors. The sweep consisted of cases involving both publicly-traded securities and privately-held companies.

The SEC alleged that the companies and individuals used the Internet to "pump" the market capitalization of the stocks involved by more than $300 million and raise $2.5 million in proceeds from investors in the U.S. and abroad. The frauds were accomplished by a variety of online means, including "spam" emails, electronic newsletters, websites, hyperlinks, message boards and other Internet media.

To date, the SEC has now brought more than 200 Internet-related enforcement actions involving a total of over 750 named individuals and entities. Previous sweeps targeted online frauds involving the touting of publicly-traded securities, the sale of bogus investment opportunities and the perpetration of "pump-and-dump" stock schemes. The SEC noted that the latest cases highlighted the following common securities fraud techniques:

False promises of imminent IPO . The SEC alleged that a private company used "spam" email and a website to announce that its upcoming, SEC-approved IPO was "imminent" and that it would realize at least $1 billion through online sales. The SEC alleged that the company never actually received SEC approval for an IPO and had no offices, no inventory, and no products or services. The SEC also alleged that the company’s owner misappropriated investor funds for a variety of personal expenses.

Baseless financial projections . The SEC alleged that a company issued a press release claiming it would "quickly reach a significant market share in the $400+ million" study aids market. The company’s share price nearly tripled an hour after the release, eventually increasing more than 1000% within two days. The SEC alleged that, in reality, the company’s internal projections anticipated a year’s time to reach, at most, a mere 5% market share of the $160 million market, and that, in support of their projections, the company had only $30 in gross sales during the entire 14-month period before the issuance of the press release.

False track record and resume. The SEC alleged that a self-proclaimed expert online stock analyst claimed that he had a proprietary computer trading system, over 14 years of investing experience and an 85% success rate. The SEC alleged that, in reality, the individual had limited personal securities trading experience, had never received any securities training, had never worked for a securities or investment firm, and used a software program available for purchase by the public which could be accessed over the Internet. The individual acknowledged that his success rate claims were misleading or false and not supported by his track record.

"Purchased" analyst coverage. The SEC alleged that a public company provided hyperlinks on its website to the reports of a purportedly independent analyst who was actually paid 12,500 shares of the company’s stock in undisclosed compensation for publishing the reports. The SEC noted that these reports merely reprinted the company’s fraudulent claims, including the assertion that the company had profitable business relationships with 14 "blue chip" companies. The SEC alleged that these alleged relationships were outright lies or gross exaggerations.

Inflated performance claims and fake testimonials. A group of three websites boasted a stock-picking track record of 60% to 240% returns, published glowing testimonials, and supposedly used a "team of experienced traders." The SEC alleged that, in reality:

  • the returns were merely hypothetical,
  • the so-called "team" of experts was, in fact, a single individual, and
  • the testimonials on two of the sites were copied almost verbatim from the third site.

The SEC also released a "Survivor Checklist" to warn investors about stock fraud on the web. SEC Today, March 1, 2001.

 

 
 



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.