Investment Management Industry News Summary-March 2004

Investment Management Industry News Summary-March 2004

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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NAST adopts best practice standards for state investments in mutual funds

March 26, 2004 2:07 PM
NAST’s best practice standards are broad and mirror many current federal proposed rules. It provides for, among other things:

  • Management fees: shall contain breakpoints, may only be approved by independent trustees, and a comparative analysis supporting such fee schedule will be published in the fund’s annual report.

  • Governance: three-quarters of the board as well as the chairman shall be independent, the independent trustees or a subcommittee shall meet with the chief compliance officer of the fund and adviser as well as the independent auditors without management present, and the independent trustees shall be directed to hire their own staff or advisers.

  • Portfolio management compensation: will be disclosed in the fund’s annual report, including the methods and factors in deriving compensation, and if a team manages the portfolio, the compensation of the top three managers and the total compensation of the team will be disclosed.

  • Management ownership of the fund: must also be reported, and portfolio managers or other senior executives of the fund or the adviser who purchases shares in one of its funds must hold those shares (other than money market fund shares) for at least 12 months.

  • Other: quarterly disclosure of mutual fund securities holdings, trading costs of the fund (including brokerage commissions) and soft dollar payments and services provided to the fund shall be disclosed.

In the event a fund does not adhere to these principles, the fund can present an alternative to the board that administers the state program and the state board would then decide whether to approve the alternative plan and invest state money into such fund. This resolution is directed to, but not binding on, state treasurers who manage state pension plans, 529 education plans, and other general investments for their state.

 
 



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.

ICI issues comment letter on SEC’s proposal requiring investment advisers to have a code of ethics

March 26, 2004 2:02 PM

The ICI has sent to the SEC a comment letter on proposed Rule 204A-1 under the Advisers Act. The proposed rule would require all registered investment advisers to adopt a code of ethics which sets forth: (i) standards of conduct for advisory personnel; (ii) provisions reasonably designed to prevent access to material nonpublic information; and (iii) a requirement that access persons of the adviser report personal securities transactions and holdings, including transactions in any mutual fund managed by the adviser.

The ICI generally supports the SEC’s proposal but provided specific comments intended to harmonize personal trading reporting obligations under the proposed rule with those under Rule 17j-1 under the 1940 Act, which requires registered investment companies and their investment advisers and principal underwriters to adopt codes of ethics. The ICI letter also responds to questions posed in the proposing release. The ICI’s comments are summarized as follows:

  • Standards of business conduct. The ICI supports the requirement that each investment adviser’s code of ethics set forth a standard of business conduct for all its supervised persons. The standard, as proposed, would reflect the adviser’s fiduciary obligations and those of its supervised persons and require compliance with applicable federal securities laws.

  • Protection of material non-public information. The ICI recommends requiring each code of ethics to include provisions reasonably designed to prevent misuse (rather than to prevent access, as proposed, by persons who do not need such information to perform their duties) of material nonpublic information about the adviser’s securities recommendations and client securities holdings and transactions.

  • Personal securities trading. The ICI recommends revising the proposed rule to make the reporting obligations of directors, officers, partners, and employees of investment advisers more consistent with reporting obligations under Rule 17j-1. The ICI recommends revising certain aspects of the proposed definition of “access person” to more closely track the definition of that term in Rule 17j-1. In particular, the ICI recommends eliminating the term “supervised persons” and instead using the term “advisory person” to be defined as any employee who, in connection with his or her regular functions or duties, obtains (rather than, as proposed, has access to) nonpublic information regarding any client's purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any registered fund.

    The ICI believes that it is essential for each advisory firm to have the flexibility to adopt codes and procedures appropriate for each business.

  • Reporting of affiliated mutual fund shares. The ICI supports the SEC’s proposal to impose reporting obligations with respect to holdings and transactions in certain affiliated mutual funds.

  • Timing of personal securities reports. The ICI supports the requirement that each access person report his or her securities holdings, but recommends that: (i) at the time the person becomes an access person, the reported information is current as of a date no more than 45 days prior to the date the report is submitted (rather than current as of the date the person becomes an access person, as proposed); (i) on a quarterly basis, no later than 30 days after the end of each calendar quarter (rather than the proposed 10 day requirement) and (iii) annually (rather than once each “12-month period”). The ICI’s recommendations are intended to decrease the burdens and potential errors by allowing access persons to use their most recent account statements showing securities holdings rather than requiring them to manually develop a list of their holdings to be current as of an earlier date.

  • Reporting of violations. The ICI supports the SEC’s proposal to require the reporting of any code of ethics violations to the adviser’s chief compliance officer, but also recommends additionally allowing one or more other persons to be designated in the code by each advisory firm so that the most appropriate person or persons would be allowed to receive such reports given each firm’s particular structure.

  • Acknowledgement of receipt of code. The ICI supports requiring each supervised person to acknowledge receipt of the code of ethics and suggests permitting such acknowledgements to be in electronic form as an alternative to the proposed written form.
  • Record-keeping. The ICI generally supports the proposed recordkeeping requirements with respect to personal securities but opposes requiring advisers to keep records of access persons’ personal securities reports (and duplicate brokerage confirmations or account statements in lieu of those reports) electronically in an accessible computer database because the costs of such a requirement would greatly outweigh its benefits.

  • Amendments to Form ADV. The ICI supports the SEC’s proposal to amend Form ADV to require advisers to describe their codes of ethics and, upon request, to furnish clients with a copy of the code. The ICI recommends permitting advisers to post the code of ethics on their websites as an alternative to providing a copy upon request.
  • The ICI recommends that the SEC provide a compliance date from 9 to 12 months after adoption of proposed Rule 204A-1 to permit sufficient lead-time for investment advisers to comply with its requirements. Letter from the ICI to Mr. Katz at the SEC regarding Investment Adviser Codes of Ethics (File No. S7-04-04), March 15, 2004.

     
     



    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 and Commodity Futures Trading Commission (“CFTC”) share oversight and information of securities futures products (“SFPs”)

    March 26, 2004 1:59 PM

    On March 17, 2004, SEC Chairman William Donaldson and CFTC Chairman James E. Newsome signed a Memorandum of Understanding (the “MOU”) regarding the oversight of SFP information and trading. The Commodities Futures Modernization Act of 2000 gives the SEC and CFTC joint authority for the oversight and regulation of SFPs.

    SFPs, which were approved by lawmakers in 2000 and began trading in 2002, have the characteristics of both securities and futures. The two exchanges that trade SFPs – ChicagoOne and NQLX – are currently under the CFTC’s primary jurisdiction. The MOU provides that the CFTC will be the primary regulator for SFP trades on a futures exchange, with the SEC being the secondary regulator, and the SEC will be the primary regulator for SFP activity originating on a securities exchange, with the CFTC being the secondary regulator.

    The MOU provides that the SEC and CFTC will notify each other of any planned examinations with respect to SFPs, advise each other of reasons for the examination, provide each other with information relating to the examination, and conduct the examination jointly if feasible. The SEC and CFTC will also notify each other of significant issues arising from these markets and will share trading data and related information regarding SFP activity. Implementation of the MOU is intended to increase the effectiveness and efficiency of the joint oversight of SFPs. SEC Press Release – SEC and CFTC Sign Memorandum of Understanding Regarding Oversight of Securities Futures Product Trading and Sharing of Security Futures Product Information, March 17, 2004; Securities Regulation and Law Report – CFTC, SEC Sign Agreement Outlining Joint Oversight of SFPs, Volume 36, Number 12, March 22, 2004.

     
     



    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 requests emails during investment adviser inspections

    March 26, 2004 1:57 PM

    Gene Gohlke, associate director of the Office of Compliance Inspections and Examinations (“OCIE”), explained in a speech at the Investment Adviser Compliance Best Practices Summit, that since September 2003 the SEC compliance examination staff has been asking registered investment advisers during routine inspections, as well as during sweep and cause exams, for their emails from the prior three months. He explained that the Investment Advisers Act of 1940 (the “Advisers Act”) gives the SEC authority to conduct such exams and request such emails.

    Section 204 of the Advisers Act provides, in part, that “all other information” an investment adviser might have is subject to “reasonable examination” by the SEC. According to Mr. Gohlke, the SEC interprets “all other information” to include personal and non-personal information both required and not required to be retained and maintained by the adviser. This would include emails and instant messages, which the SEC treats like emails, even though there is no specific requirement in the Advisers Act, as there is for registered broker-dealers under the Securities Exchange Act of 1934, that such communications be retained as a record. He explained that the staff is working to amend and modernize the books and records rules, which he noted have not yet been updated to address email, under the Advisers Act. Mr. Gohlke also commented that Rule 204-2 of the Advisers Act requires investment advisers to maintain records in an easily accessible place for a minimum of five years and that an adviser must produce these records “promptly” when requested by the SEC. He stated that the OCIE interprets “promptly” to mean within 24 hours, but that he is unsure whether any adviser has been held to the 24 hour standard since the OCIE has been requesting emails. He noted that supplying information two months later would clearly exceed the time limit.

    Finally, Mr. Gohlke commented that claims of the attorney-client or other forms of privilege for communications not subject to inspection have increased significantly since the OCIE began requesting the production of emails. He explained that determining whether something is privileged can take months and defeats the purpose of the exam. To facilitate the sorting of such emails, he recommended that advisory firms label privileged emails in the subject line or at the top of the document. Additionally, if an adviser claimed that every email that was copied to the firm’s general counsel was privileged, the staff would likely ask for a privilege log of each email. Securities Regulation and Law Report – SEC Inspection Staff Seek Adviser E-Mail; Volume 36, Number 12, March 22, 2004.

     
     



    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.

    ICI issues comment letter on SEC’s fund governance proposals

    March 18, 2004 2:39 PM

    On March 10, the ICI issued its comment letter (the “ICI letter”) on the SEC’s proposals to require funds to adopt specified governance practices and to require funds to retain copies of all written materials the board considers when approving the fund’s advisory contract. The ICI’s comments on these SEC proposals are summarized below:

    Independent chairman of the board

    The ICI letter opposes the SEC’s proposal to require an independent chairman for all fund boards, stating that the selection of an appropriate person to serve as chairman of the board rightfully is, and should continue to be, a decision made by the directors. The ICI letter comments that mandating an independent chairman would prohibit fund directors from exercising their judgment and oversight responsibilities. The ICI also states that requiring an independent chairman would be unnecessary in the fund context because fund boards are required to have a majority of independent directors who are in a position to select the most appropriate person to serve as chairman and because the 1940 Act requires independent directors of funds to vote separately on the most significant items. The ICI letter also expresses concerns that this proposal might impose additional regulatory responsibilities on the chairman and that the independent chairman ultimately would be drawn into the day-to-day operations and management of the fund, which would be inconsistent with the appropriate oversight role of directors.

    The ICI supports, as an alternative, a requirement that the chairman of the board be elected annually by both a majority of the board as a whole and a majority of the independent directors. Alternatively, or in addition to an annual election, the ICI supports the requirement for funds that do not have an independent chair (1) to appoint a “lead independent director” who can review the agenda for regular meetings and/or (2) to submit the agenda to the independent directors for review to ensure that matters of interest to independent directors are scheduled to be discussed at meetings.

    Independent directors constituting 75% of the board

    The ICI letter supports a requirement to have a supermajority of independent directors, but rather than the SEC’s proposed 75% supermajority, the ICI recommends a two-thirds supermajority consistent with the ICI’s prior best practices recommendations. The ICI letter states that the disruption and costs to fund boards to change their current practice of a two-third supermajority to a 75% supermajority would not be justified due to the absence of any foreseeable benefits to investors.

    Annual self-assessment

    The ICI letter supports the SEC’s proposal to require fund directors to perform an annual evaluation of the effectiveness of the board and its committees and to evaluate the number of funds on whose boards each director serves. The ICI agrees with the SEC’s decision not to require written self-assessment reports and notes that the minutes of the board should be sufficient for the SEC’s examination staff to verify that the board has undertaken its annual self-assessment. The ICI letter also responded to the SEC’s request for comment on whether it should restrict the number of boards on which a director serves by stating that the ICI strongly believes it would not be appropriate for the SEC to dictate the number of fund boards on which a director may serve. The ICI’s position is that any number imposed by regulation would be arbitrary and not necessarily appropriate in all circumstances due to the variety of factors that affect a director’s commitments and obligations both inside and outside of boardrooms. The ICI states there is no universal optimal number of boards on which a director may serve that ensures that sufficient attention will be paid to each board. The ICI letter noted the significant benefits for directors to serve on multiple boards, including the opportunity to gain better familiarity with complex-wide fund operations. The ICI also recommends that the SEC leave to the discretion of individual boards the determination of whether they need to adopt policies regarding service on other boards.

    Separate quarterly meetings of independent directors

    The ICI supported the SEC’s proposal to require independent directors to meet at least once quarterly in a separate session at which no interested persons of the fund would be present. This would provide independent directors the opportunity for frank and candid discussions, to review management of the fund and to consider areas for improvement.

    Independent director staff

    The ICI agrees with the SEC that independent directors should be able to obtain expert advice for matters that are beyond their experience and expertise. The ICI supports the SEC’s approach of not dictating that independent directors must hire their own staff.

    In response to the SEC’s request for comment on whether it should require independent legal counsel, the ICI states that independent directors should not be required to hire independent counsel but rather given the option to hire independent counsel at any time.

    Recordkeeping for approval of advisory contracts

    In response to the SEC’s proposal to amend Rule 31a-2 under the 1940 Act to require funds to retain copies of the written materials that directors consider in approving an advisory contract, the ICI supports such proposal and agrees that it is appropriate for the SEC to adopt a formal requirement to assist the staff in confirming the fund’s compliance with the requirements of Section 15 under the 1940 Act. Section 15 requires, among other things, that directors request from the adviser information reasonably necessary to evaluate the advisory contract for approval each year.

    ICI Letter to Mr. Katz of the SEC regarding Investment Company Governance, File No. S-7-03-04, March 10, 2004.

     
     



    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 considers alternatives to the proposed late trade rule

    March 18, 2004 2:37 PM
    At a recent Senate Hearing, Paul Roye, director of the SEC’s division of investment management, stated that the SEC received more than 800 comment letters on its proposed “hard 4 p.m.” cut-off for trade orders. Under the proposed rule, the SEC would require that a fund or a certified clearing agent – rather than a broker-dealer or other unregulated intermediary – receive fund purchase and redemption orders prior to 4 p.m. for an investor to receive that day’s price. Critics argue that this proposal requires broker-dealers and other intermediaries to set cut-offs for orders significantly earlier than 4 p.m. and limits the ability of investors to place orders to purchase fund shares. He noted that “while we believe the proposed rule amendment would virtually eliminate the potential for late trading through intermediaries that sell fund shares, it is clear from the comments that some believe that a ‘hard 4’ rule is not the preferred approach.” As a consequence, the SEC is studying other approaches to address this issue.

    The Boston Globe, SEC eyes options to late trade rule, March 11, 2004.
     
     



    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 issues no-action letter clarifying communications not deemed as advertising

    March 18, 2004 2:33 PM

    In a recently published no-action letter, the SEC provides guidance concerning the application of Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) to certain types of communications. Rule 206(4)-1(b) defines “advertisement” as including, in part, any written communication addressed to more than one person, and any notice or other announcement in any publication or through radio or television, which offers (1) any analysis, report or publication concerning securities, or (2) any graph, chart, formula or other device to be used in determining whether to buy or sell any security, or (3) any other investment advisory service with regard to securities.

    Oral communications

    The no-action letter states that by its terms, the rule applies to written communications addressed to more than one person, including announcements in publications and on radio and television broadcasts. However, the rule does not apply to any other oral communications. The no-action letter notes that whether any particular communication constitutes an advertisement under Rule 206(4)-1(b) under the Advisers Act depends on all the facts and circumstances.

    Written communications responding to unsolicited requests

    The no-action letter clarifies that a written communication by an investment adviser that does no more than respond to an unsolicited request by a client, prospective client or consultant for specific information about the adviser’s past specific recommendations is not an “advertisement.” For example, if a consultant specifically requests an investment adviser to provide it with written information about the adviser’s past specific recommendations, the adviser’s mere communication of that information in writing to the consultant would not, by itself, be an “advertisement” within the meaning of the rule and would not be prohibited by Rule 206(4)-1(a)(2) under the Advisers Act, so long as the adviser did not directly or indirectly solicit the consultant to make the request. Rule 206(4)-1(a)(2) provides, in part, that it shall constitute a fraudulent, deceptive, or manipulative practice for any investment adviser registered under the Advisers Act to publish, circulate, or distribute any “advertisement” which refers to past specific recommendations of such investment adviser that were or would have been profitable to any person.

    Written communications to existing clients

    The no-action letter also states that a written communication by an investment adviser to its existing clients generally would not be an “advertisement” within the meaning of rule 206(4)-1(b) merely because it discusses the adviser’s past specific recommendations concerning securities that are or were recently held by each of those clients. The no-action letter notes, however, that the SEC would conclude a communication to an existing client to be an “advertisement” if the past specific recommendations presented by the investment adviser suggest that the purpose of such communication is to provide advisory services. For example, a letter written by an adviser that discussed its past specific recommendations concerning securities not held or not recently held by some of the clients to whom the letter is addressed may constitute an “advertisement” and be prohibited by Rule 206(4)-1(a)(2).

    SEC No-Action Letter, Investment Counsel Association of America, Inc., March 1, 2004.

     
     



    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 additional 8-K requirements

    March 18, 2004 2:17 PM

    On March 16, 2004, the SEC published final rules adopting amendments to Form 8-K, the Securities Exchange Act of 1934 (the “1934 Act”) form used by public companies to disclose on a current basis important corporate events. The amendments respond to the goals of Section 409 of the Sarbanes-Oxley Act by requiring public companies to disclose, “on a rapid and current basis,” material information regarding changes in a company’s financial condition or operations determined to be necessary or useful for the protection of investors and in the public interest. The amendment provides investors with timelier disclosure by replacing the current five business and 15 calendar day Form 8-K deadlines with a new four business day deadline.


    The 8-K amendments require disclosures concerning the following items:

    • entry into a material non-ordinary course agreement;
    • termination of material non-ordinary course agreement;
    • creation of a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
    • triggering events that accelerate or increase a material direct financial obligation or material obligation under an off-balance sheet arrangement;
    • material costs associated with exit or disposal activities;
    • material impairments;
    • notice of delisting or failure to satisfy a continued listing rule or standard, or a transfer of listing;
    • non-reliance on previously issued financial statements or a related audit report or completed interim review (restatements);
    • unregistered sales of equity securities; and
    • material modifications to rights of security holders.

    In addition, existing disclosure items regarding appointment, election or departure of directors and principal officers, and amendments to organizational documents have been expanded.

    Compliance with these amendments will be required as of August 23, 2004.

    SEC press release, “SEC votes to adopt additional 8-K requirements and to propose amendments to Form 20-F and fund manager disclosure requirements,” March 11, 2004; SEC Release Nos. 33-8400; 34-49424; File No. S7-22-02.

     
     



    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 on portfolio management disclosure

    March 18, 2004 2:11 PM

    The SEC proposed, on March 11, 2004, amendments to Forms N-1A, N-2 and N-3 to improve disclosure regarding portfolio management provided by registered management investment companies (“funds”). The proposed rule would require funds to disclose additional information about their portfolio managers, including information about other accounts managed by them, their compensation structures, and the ownership of securities in accounts they manage. These proposals are intended to provide greater transparency regarding a portfolio manager’s incentives and potential conflicts of interest that may arise when managing other investment vehicles.

    Identification of portfolio management team members

    The SEC is proposing amendments to Forms N-1A and N-2 that would require a fund to identify in its prospectus each member of a committee, team, or other group of persons associated with the fund’s investment adviser that is jointly and primarily responsible for the day-to-day management of the fund’s portfolio. The fund would be required to state the name, title, length of service, business experience and role (i.e., lead member) of each member of its portfolio management team.

    The SEC is also proposing to amend Form N-3, the registration form for insurance company managed separate accounts that issue variably annuity contracts, to require similar portfolio management disclosure. Currently, Form N-3 does not require disclosure of a separate account’s portfolio managers.

    The SEC seeks comment on, among other things, whether the requirement to identify and disclose information on all of the members of a fund’s portfolio management team is appropriate and whether the “jointly and primarily responsible” standard is suitable.

    Disclosure regarding other accounts managed, potential conflicts of interest, and policies and procedures to address conflicts

    A fund would be required to disclose in its statement of additional information (“SAI”) information about other accounts that the fund’s portfolio manager is primarily responsible for managing on a day-to-day basis. This disclosure is designed to help investors assess potential conflicts of interest that may result from overlapping management of a fund and one or more other accounts.

    As proposed, a fund would be required to disclose the number of other accounts managed by a portfolio manager and the total assets in those accounts for each of the following categories: (i) registered investment companies, (ii) other investment companies, (iii) other pooled investment vehicles, (iv) and other accounts. The fund would also be required to describe any potential conflicts of interest in connection with the portfolio manager’s management of multiple accounts and either include or describe the fund’s or its adviser’s policies and procedures that address such conflicts. In this regard, the SEC notes that it recently adopted a rule requiring investment advisers to implement policies and procedures that address conflicts arising from managing multiple funds and accounts.

    Disclosure of portfolio manager compensation structure

    Under the proposed rule, a fund would be required to disclose in its SAI the structure of, and method used to determine, portfolio manager compensation but not the actual amount of such compensation. Disclosure regarding a portfolio manager’s compensation would include compensation received from the fund, its investment adviser, or any other source with respect to management of the fund and any other accounts managed by the portfolio manager that the fund included in response to the proposed disclosure described above regarding other accounts. Compensation would include salary, bonus, deferred compensation, and pension and retirement plans and arrangements, whether the compensation is paid in cash or not. For each type of compensation, the fund would be required to include a description of the criteria used to determine the compensation (i.e., whether the compensation is fixed, based on the fund’s pre- or after-tax performance over a period of time, and based on the value of the assets in the fund’s portfolio), and any differences between the method used to determine the portfolio manager’s compensation with respect to the fund and other accounts.

    Disclosure of securities ownership of portfolio managers

    The proposed rule would also require a fund to disclose in its SAI any securities owned by each of its portfolio managers (and his or her immediate family members) in: (i) the fund; (ii) other accounts that the fund included in response to the proposed disclosure requirement described above regarding other accounts managed by the portfolio manager; and (iii) any other account, including an investment company, managed by an investment adviser of the fund, or by any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the fund. With respect to managed separate accounts that issue variable annuity contracts, securities required to be disclosed would include securities in any investment company or account managed or sponsored by the sponsoring insurance company, or by any person directly or indirectly controlling, controlled by, or under common control with the sponsoring insurance company.

    The proposed rule would require funds to provide securities ownership information in tabular format, on an aggregate basis for its portfolio managers and their immediate family members, including: (1) the name of the portfolio manager; (2) the account in which the portfolio manager or immediate family member owns securities; (3) the title of the class of securities owners; and (4) the dollar range of securities owned.

    Removal of exclusion of index funds

    The SEC is proposing to remove the current provision in Form N-1A that excludes index funds from providing disclosure regarding its portfolio managers. Currently, index funds are excluded from the portfolio manager disclosure requirement because the portfolio management of such funds is, to some extent, mechanical. The SEC notes that the proposed rules regarding portfolio managers are as important to investors in index funds as they are for fund investors generally. The SEC further notes that conflicts of interest may arise, for example, in determining trading execution priorities when a portfolio manager for an index fund also manages an actively-managed fund that invests in some or all of the same securities as the index fund.

    Disclosure of availability of information

    The fund would be required to include a statement in its prospectus, adjacent to the portfolio management disclosure, that the SAI provides additional information about portfolio managers’ compensation, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the fund and other accounts managed by the investment adviser or the portfolio managers. In addition, the proposed rule would require the back cover page of a fund’s prospectus to state whether the fund makes its SAI and annual and semi-annual reports available, free of charge, on or through its website, and if not, the reasons why it does not do so.

    The SEC also proposes amendments to Forms N-2 and N-3 that would require similar disclosure on the front cover page of prospectuses for closed-end funds and insurance company separate accounts and would also require a statement explaining how to obtain the fund’s shareholder reports, and a toll-free (or collect) telephone number for investors to call to request the fund’s SAI, annual and semi-annual reports, and to make shareholder inquiries. The proposed amendments to Forms N-2 and N-3 would change from optional to mandatory the disclosure of the SEC’s internet website address.

    Amendment of Form N-CSR

    Closed-end funds would be required under the proposed rule to provide disclosure regarding their portfolio managers in their annual reports on Form N-CSR, rather than in their SAI’s because closed-end funds generally are not required to maintain an updated SAI. This disclosure would include basic information (name, title, length of service, and business experience) that is current as of the date of filing of the report, as well as disclosure regarding other accounts managed by a portfolio manager, compensation structure, and ownership of securities as of the most recently completed fiscal year. Closed-end funds would also be required to disclose any change in their portfolio managers and to provide all of the proposed portfolio manager disclosure for any newly identified portfolio manager as of the most recent practicable date in their semi-annual reports on Form N-CSR.

    In the SEC’s open meeting held on March 11, 2004, where this proposed rule was discussed, the SEC commissioners were generally in favor of the proposal but expressed concerns regarding an unintended imposition on the privacy of fund managers by requiring disclosure on their securities ownership. It was noted by one commissioner that identifying which persons are participants on a fund’s investment advisory team is complex and not always clear.

    Comments must be received by the SEC on or before May 21, 2004.

    SEC Release Nos. 33-8396; 34-49398; IC-26383; File No. S7-12-04.

     
     



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

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

    SEC is preparing a proposed rule to require hedge fund managers to register

    March 12, 2004 2:56 PM

    On March 5, 2004, William H. Donaldson, Chairman of the SEC, announced in a speech to the Practicing Law Institute that the staff of the SEC is preparing a proposed rule to require hedge fund managers to register as investment advisers. Mr. Donaldson commented that many hedge fund advisers typically escape registration as investment advisers by reaching their clients indirectly through pooled vehicles. He also noted that the pool of hedge fund assets is big enough – approximately $700 billion and growing rapidly toward $1 trillion – and the thresholds for investment are low enough, that the SEC needs a reliable way of collecting information on them. Mr. Donaldson stated that requiring hedge fund managers to register as investment advisers would give the SEC greater insight into the activities of hedge fund managers and improve the SEC’s ability to detect and deter fraud. No further information regarding the proposed rule is currently available.


    Adviser Compliance Associates, LLC, Compliance Alert SEC Preparing Rule to Require Hedge Fund Managers to Register, March 5, 2004; SEC Speeches and Statements by the Chairman and Commissioners, March 5, 2004

     
     



    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 Regulation NMS for public comment

    March 12, 2004 2:52 PM

    On February 26, 2004, the SEC published Regulation NMS for public comment. As proposed, Regulation NMS redesignates the existing national market system (“NMS”) rules adopted under Section 11A of the Exchange Act and incorporates four substantive proposals designed to enhance and modernize the regulatory structure of the U.S. equity markets.

    Trade-throughs

    The SEC is proposing a uniform rule for all NMS market centers that, subject to certain exceptions, would require a market center to establish, maintain, and enforce policies and procedures reasonably designed to prevent “trade-throughs” (i.e., the execution of an order in its market at a price that is inferior to a price displayed in another market).

    There are two exceptions to the proposed trade-through rule. The first exception would allow a market center to execute an order that trades through a better-priced bid or offer on another market center if the person entering the order makes an informed decision to affirmatively opt out of the trade-through protections. Informed consent would need to be given on an order-by-order basis. The second exception would allow for an automated market (i.e., one that provides for an immediate automated response to incoming orders for the full size of its best displayed bid or offer, without restriction) to trade through a better displayed bid or offer on a non-automated market up to a de minimis amount of one to five cents, depending on the stock’s price. The proposed trade-through rule would not change a broker-dealer’s existing duty to obtain best execution for customer orders.

    Intermarket access

    Proposed Regulation NMS would establish a uniform market access rule that would help to assure non-discriminatory access to the best prices displayed by market centers without mandating inflexible, “hard” linkages such as the Intermarket Trading System. The proposal would prohibit a market center from imposing unfairly discriminatory terms that prevent or inhibit any person from accessing its quotations indirectly through a member, customer, or subscriber. In addition, proposed Regulation NMS would establish an access fee standard (capped at $0.0001 per share, and the aggregation of this fee would be limited to no more than $0.002 per share in any transaction) designed to promote a common quoting convention, harmonize quotations, and facilitate the ready comparison of quotes across the NMS. The proposed rule would also require each SRO to establish and enforce rules requiring its members to avoid and prohibit the pattern or practice of locking or crossing the markets.

    Sub-penny pricing

    Proposed Regulation NMS would ban sub-penny quoting in most stocks. Specifically, market participants would be prohibited from accepting, ranking, or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in NMS stocks, except for securities with a share price of below $1.00.

    Market data

    Finally, the SEC is proposing amendments to the rules and joint industry plans for disseminating market information to the public that, among other things, would replace the current plan formulas for allocating revenues to SROs derived from market data that are based solely on the number of trades or share volume reported by an SRO. In general, the proposed new formula would divide market data revenues equally between trading and quoting activity to reward markets that publish the best accessible quotes.

    Comments must be received on or before May 24, 2004.

    SEC Release No. 34-49325; File No. S7-10-04.

     
     



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

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

    SEC settles enforcement action against a broker-dealer for repeated document production failures during a pending investigation

    March 12, 2004 2:47 PM
    On March 10, 2004, the SEC settled an enforcement action against a broker-dealer for violations of the recordkeeping and access requirements under Sections 17(a) and 17(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”) and Rule 17a-4(j) thereunder.
    The broker-dealer’s violations were committed during a pending SEC investigation that is seeking to determine whether, among other thing, the broker-dealer and other persons engaged in improper securities trading with proprietary accounts prior to the public dissemination of the firm’s equity research. During the investigation, the SEC found that the broker-dealer repeatedly failed to furnish documents requested by the staff. In particular, the SEC found that the broker-dealer failed in a timely manner (i) to produce electronic mail, including a particular email exchange relating to matters that the broker-dealer knew were under investigation, (ii) to produce certain compliance reviews after the staff had requested them, and (iii) to produce compliance and supervision records concerning the personal trading activities of a former senior employee of the firm. When questioned about certain production failures and delays, the broker-dealer provided the staff with misinformation concerning the availability and production status of such documents, and engaged in delaying tactics that impeded the SEC’s investigation.

    Section 17(a)(1) of the Exchange Act requires broker-dealers to preserve certain records and furnish these records to the SEC upon request. Section 17(b) of the Exchange Act provides, in part, that all required records are subject at any time to such reasonable periodic, special or other examinations by the SEC and the appropriate regulatory agency as the SEC or the appropriate regulatory agency deems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. Rule 17a-4(b)(4) specifically requires broker-dealers to “preserve for a period of not less than 3 years, the first two years in an accessible place…[o]rginals of all communications received and copies of all communications sent by such member, broker or dealer (including inter-office memoranda and communications) relating to his business as such.”

    The SEC noted that internal email communications relating to a broker-dealer’s “business as such” fall within the scope of Rule 17a-4 and that the content of the electronic communication is determinative as to whether that communication is required to be retained and made accessible to the SEC. Rule 17a-4(j) requires each broker-dealer subject to this rule to furnish promptly to the SEC such legible, true and complete copies of those records of the broker-dealer which are required to be preserved under this rule, as are requested by the representative of the SEC.

    In the release, the SEC commented that “[p]rompt access to a broker-dealer’s books and records is fundamental to the [SEC’s] ability to discharge its examination, investigative and law enforcement responsibilities.” The SEC further noted that its authority to examine a broker-dealer’s books and records is unconditional, and is subject only to the requirement that any such examination be reasonable. When a broker-dealer unreasonably delays producing documents sought during an investigation, the staff commented that it impedes the staff’s fact finding capability, can prevent the staff from determining whether violations of law have occurred or are occurring, and can interfere with the SEC’s ability to prevent future harm to investors. The SEC commented that such misconduct compromises the integrity of its processes and warrants immediate, enforcement action.

    In the SEC’s press release announcing the settlement, Stephen Cutler, Director of the SEC’s Division of Enforcement stated that “[t]oday’s action makes clear that [the SEC] will not tolerate unreasonable delay in responding to [the SEC’s] inquiries and will act aggressively to protect the integrity of the [SEC’s] investigative processes.”

    As part of the settlement, the broker-dealer agreed to a censure and a $10 million civil penalty.

    In the Matter of Banc of America Securities LLC, Exchange Act Release No. 49386, March 10, 2004; Admin. Proc. File No. 3-11425; SEC press release 2004-29.
     
     



    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 on mandatory redemption fees for mutual funds

    March 12, 2004 2:43 PM

    Shareholder Accounts and Intermediaries

    Proposed rule 22c-2 would provide funds three methods of imposing redemption fees with respect to financial intermediaries through which investors purchase and redeem shares. Under the first method, the intermediary must transmit to the fund (or its transfer agent) at the time of the transaction the account number used by the intermediary to identify the transaction. This would enable the fund to match the current transaction with previous transactions by the same account and assess the redemption fee when it is applicable.

    Under the second method, the intermediary and the fund would enter into an agreement requiring the intermediary to identify redemptions of account holders that trigger the application of the redemption fee, and transmit holdings and transaction information to the fund (or its transfer agent) sufficient to allow the fund to assess the amount of the redemption fee. Under this approach, the intermediary would be required to submit substantially less data along with each transaction than under the first method.

    Under the third method, the fund and the financial intermediary would enter into an agreement requiring the intermediary to impose the redemption fees and remit the proceeds to the fund. This approach would require the intermediary to determine which transactions are subject to the fee and to assess the fee. This method is designed to alleviate the burden on intermediaries to transmit shareholder account and transaction information to the funds on a transaction-by-transaction basis.

    Regardless of which of the three methods are used, the proposed rule would also require that, on at least a weekly basis, the financial intermediary provide to the fund the taxpayer identification number, and the amount and dates of all purchases, redemption, or exchanges for each shareholder within an omnibus account during the previous week. This information is designed to enable the fund to confirm the proper assessment of redemption fees, to detect market timers, and to determine the appropriate receipt of breakpoint discounts (if applicable) for shareholders on purchases of fund shares sold with a front-end sales load.

    Comments must be received by the SEC on or before May 10, 2004.

    SEC Release No. IC-26375A; File No. S7-11-04.

     
     



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

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

    ICI files comment letter on SEC concept release regarding disclosure of mutual fund transaction costs

    March 5, 2004 3:14 PM

    On February 23, 2004, the ICI submitted a letter to the SEC in response to its concept release on measures to improve disclosure of mutual fund transaction costs. The most significant aspects of the letter as identified by the ICI in a memorandum to members are as follows:

    ICI Recommendations

    In its letter, the ICI recommends that the SEC take the following actions:

    Require new disclosure in the financial highlights table of brokerage commissions paid by a fund (1) as a percentage of average net assets, and (2) as a percentage of the principal amount of transactions. These disclosures should be accompanied by disclosure stating the portion of trades that were executed on a commission basis, spread basis, or some other basis as well as the explanation of factors and variables that affect commission rates.

    • Require new disclosure in the financial highlights table of a fund’s gross inflows and outflows as a percentage of average net assets.
    • Require funds to include in the section of a fund’s prospectus discussing its principal investment strategies the portfolio turnover rate for the five most recent fiscal years, as well as narrative disclosure explaining the meaning of portfolio turnover and its relationship to portfolio transaction costs, the impact that fund’s management style would have on portfolio turnover and transaction costs, and a description of portfolio transaction costs associated with the principal types of securities, or markets, in which the fund will invest. Funds should be required to add a standardized legend immediately subsequent to the fee table portion of the risk-return summary to alert investors that the figures in the table do not include transaction costs and to reference the section of the prospectus that includes the discussion of the fund’s portfolio turnover rate. The MDFP in annual shareholder reports should be required to describe the factors affecting portfolio turnover for the most recently completed period.
    • Require fund prospectuses to include narrative disclosure of a fund’s policies and procedures for monitoring transaction costs and brokerage allocation that is currently required to be disclosed in Statements of Additional Information. Funds should also be required to provide narrative disclosure of information about a fund’s soft dollar arrangements, including the general types of products and services received, how the fund’s adviser utilizes such products and services, whether or not they are unsolicited and what role, if any, they play in selecting brokers.
    • Require fund boards to approve the policies and procedures of the fund’s adviser for reviewing transaction costs, and require advisers to provide boards with reports on a periodic basis (e.g., annually) containing certain information about the fund’s transaction costs.
    • There is no single agreed-upon measure of transaction costs.
    • Each of the existing measurements of transaction costs has significant limitations. First, several of the methods would include some, but not all, of the components of transaction costs, thereby presenting an incomplete picture of these costs to investors. Second, the manner in which a trader executes an order may bias transaction cost measurements under these methods. Because of these limitations, several of the measures could encourage the execution of transactions in a manner that is intended to minimize transaction costs, potentially at the expense of the best overall trade execution for the fund.
    • Mandating the use of any of the measures to quantify and disclose transaction costs would place an enormous burden on funds in terms of recordkeeping and operational requirements, especially small and midsize fund complexes.

    Proposals to Quantify All Transaction Costs

    The ICI’s letter states that it would be inappropriate to attempt to quantify all transaction-related costs incurred by funds and require funds to disclose such a measure for the following reasons:

    Accounting Issues

    The ICI’s letter states that commissions paid should not be reflected as an expense in fund financial statements because doing so would understate net investment income and overstate unrealized/realized gains as well as cause “book-tax differences” necessitating additional recordkeeping efforts by fund managers. The letter also opposes including commission costs that do not relate to execution and clearing (i.e., soft dollars) as an expense in fund financial statements. In addition, the letter states that other types of transaction costs also should not be included as expenses in fund financial statements because these costs (1) cannot be reliably measured with the degree of precision necessary to include them in financial statements, and (2) constitute acquisition and disposition costs, which are included in the cost basis of securities purchased or reduce the proceeds of sales.

    ICI Memorandum 17130, February 24, 2004.

     
     



    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 extends compliance date for amendments to Rules 30a-2 and 30a-3 under the 1940 Act regarding the maintenance of internal control over financial reporting

    March 5, 2004 3:13 PM
    On February 24, 2004, the SEC extended the compliance date for amended Rule 30a-3 under the 1940 Act to fiscal years ending on or after November 15, 2004. Amended Rule 30a-3, adopted in June 2003 to implement Section 302 of the Sarbanes-Oxley Act for registered investment companies, requires funds other than small business investment companies to maintain internal control over financial reporting. The adopting release originally required funds to comply with the amendment for fiscal years ending on or after June 15, 2004.
    The SEC also extended the compliance date for amendments to the representations that must be included in the certifications required by Rule 30a-2 under the 1940 Act regarding the company’s internal control over financial reporting. Funds must comply with the amended portion of the introductory language in paragraph 4 of the certification in Form N-CSR that refers to the certifying officers’ responsibility for establishing and maintaining internal control over financial reporting for the fund, as well as with paragraph 4(b) of the certification in Form N-CSR, beginning with the first annual report filed on Form N-CSR for a fiscal year ending on or after November 15, 2004.

    SEC Release Nos. 33-8392, 34-49313, IC-26357; File Nos. S7-40-02, S7-06-03; see also SEC Release Nos. 33-8238, 34-47986, IC-26068; File Nos. S7-40-02, S7-06-03.
     
     



    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 releases final rule on shareholder reports and quarterly portfolio disclosure

    March 5, 2004 3:08 PM

    On February 27, 2004, the SEC released final rule and form amendments under the Securities Act of 1933, the Securities Exchange Act of 1934 (the “Exchange Act”), and the 1940 Act to improve the periodic disclosure provided by funds about their costs, portfolio investments and past performance.

    Disclosure of Fund Expenses

    The amendments require mutual funds to disclose in their reports to shareholders fund expenses borne by shareholders during the reporting period. Mutual fund shareholder reports are required to include two expense examples showing (1) the cost in dollars associated with an investment of $1,000, based on the fund’s actual expenses and return for the period, and (2) the cost in dollars associated with an investment of $1,000, based on the fund’s actual expenses for the period and an assumed annual return of 5%. The two expense figures are designed to increase investor understanding of the fees that they pay on an ongoing basis for investing in a fund.

    Under the amendments, the figures for beginning and ending account value and expenses paid are required to be shown in a tabular format. The instructions to the table clarify that the expense calculations are to be based on the fund’s most recent fiscal half-year (the fund’s second fiscal half-year in the case of an annual report). A fund is required to state, in a footnote to the table, that expenses are equal to the fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the fund’s most recent fiscal half year divided by 365 or 366 (to reflect the one-half year period shown). The expense ratio shown in the footnote to the table must be expressed on an annualized basis and calculated in the manner required in the financial highlights table using the expenses for the fund’s most recent fiscal half-year. The numerical expense disclosure must be accompanied by a prescribed narrative explanation, including an explanation of the types of costs charged by mutual funds and the assumptions used in the example. The required narrative disclosure must explain how the investor can use the information in the first expense example, together with the investor’s account value, to estimate the expenses that the investor paid.

    Disclosure of Portfolio Holdings

    1. Summary Portfolio Schedule

    The amendments permit a fund to include a summary portfolio schedule in its reports to shareholders, provided that the complete portfolio schedule is filed with the SEC semi-annually on Form N-CSR and is provided to shareholders upon request, free of charge. The complete portfolio schedule must, however, continue to be available to investors free of charge. The amendments are designed to streamline shareholder reports and help investors to focus on a fund’s principal holdings, and thereby better evaluate the fund’s risk profile and investment strategy.

    Under the amendments to Regulation S-X, a fund may include in its reports to shareholders a summary portfolio schedule, Schedule VI, in lieu of the full schedule contained in Schedule I. The summary portfolio schedule must include each of the fund’s 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds 1% of the fund’s net asset value. Funds must continue to provide a complete list of its investments in affiliated issuers and investments other than securities.

    With respect to each issue required to be listed, the schedule would show (1) the name of the issuer and title of issue, (2) the balance held at the close of the period, (3) the value of the issue at the close of the period, and (4) the percentage value of the issue compared to net assets. The summary schedule would also show the total value of all investments in securities of unaffiliated issuers.

    Funds continue to be required to include in their reports to shareholders the other schedules currently required by Regulation S-X.

    2. Exemption of Money Market Funds from Portfolio Schedule Requirements in Shareholder Reports

    The amendments permit money market funds to omit Schedule I, from their reports to shareholders, provided that they make this schedule available to shareholders upon request and free of charge, and disclose the availability of the schedule in their reports to shareholders. The amendments require money market funds to file their complete portfolio holdings schedules semi-annually on Form N-CSR, however, so that complete information about their portfolios remains available to interested investors. In addition, any money market fund that does not include its complete portfolio schedule in its reports to shareholders is required to disclose in its shareholder reports that its complete schedule of investments in unaffiliated issuers is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number, (2) on the fund’s website, if applicable, and (3) on the SEC’s website. The amendments also require a money market fund to send its complete schedule of investments in securities of unaffiliated issuers within three business days of receipt of the request.

    3. Tabular or Graphic Presentation of Portfolio Holdings

    The amendments require a fund to include in its annual and semi-annual reports to shareholders a presentation using tables, charts, or graphs that depicts the fund’s portfolio holdings by reasonably identifiable categories (e.g., industry sector, geographic region, credit quality, or maturity). The SEC believes that such a presentation could illustrate, in a concise and user-friendly format, the allocation of a fund’s investments across asset classes. Funds have the flexibility to determine both the categories to be used and the format (e.g., tables, charts, graphs, etc.) of the presentation. The categories must be selected, and the presentation formatted, in a manner reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives. The amendments require that the tables, charts, or graphs depict the “portfolio holdings,” rather than the “securities holdings” of the fund to clarify that the tabular or graphic presentation must reflect all of the investment activities of the fund, and not just investments in securities of unaffiliated issuers or investments in securities generally.

    4. Quarterly Filing of Complete Portfolio Schedule

    The amendments require a fund to file its complete portfolio holdings schedule on a quarterly basis. The complete portfolio schedules for the second and fourth fiscal quarters are filed on Form N-CSR, and complete portfolio schedules for the first and third fiscal quarters would be filed on new Form N-Q within 60 days of the end of the quarter. Form N-Q requires funds to file the same schedules of investments, which may be unaudited, that are currently required in annual and semi-annual reports to shareholders.

    A fund is required to include in its annual and semi-annual reports a statement that (1) the fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q, (2) the fund’s Forms N-Q are available on the SEC’s website, (3) the fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room, and how information on the operation of the Public Reference Room may be obtained, and (4) if the fund makes the information on Form N-Q available to shareholders on its website or upon request, a description of how the information may be obtained from the fund.

    Form N-Q must be signed and certified by the fund’s principal executive and financial officers, consistent with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Rule 30a-3 under the 1940 Act is amended to broaden the definition of disclosure controls and procedures to include controls and procedures designed to ensure that information required to be disclosed on Form N-Q is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

    Management’s Discussion of Fund Performance (“MDFP”)

    The amendments require that a mutual fund, other than a money market fund, include MDFP in its annual reports to shareholders. Currently, a mutual fund is required to include MDFP in its annual report only if it does not include such disclosure in its prospectus.

    Compliance Date

    The amendments will become effective on May 10, 2004, and all fund reports to shareholders for periods ending on or after July 9, 2004 are required to comply with them. Funds are required to file quarterly reports on Form N-Q with respect to any fiscal quarter ending on or after July 9, 2004. Funds are required to comply with the amendments to Items 10(b) and 11 of Form N-CSR upon the effective date. However, transition provisions in Form N-CSR require funds to comply with some of the current requirements of these Items, which require disclosure of changes in internal control over financial reporting with respect to the entire semi-annual period covered by the report, until the earlier of June 30, 2005, or the date that a fund has filed its first report on Form N-Q.

    Funds are not required to comply with the portion of the introductory language in paragraph 4 of the certification in Item 3 of the Form N-Q that refers to the certifying officers’ responsibility for establishing and maintaining internal control over financial reporting, or with paragraph 4(b) of the certification, until the first report on Form N-Q following a report on Form N-CSR that is required to contain these portions of the certification.

    SEC Release Nos. 33-8393, 34-49333, IC-26372; File No. S7-51-02.

     
     



    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 prohibiting the use of brokerage commissions to finance distribution

    March 5, 2004 3:03 PM

    The SEC proposed, on February 24, 2004, amendments to Rule 12b-1 under the 1940 Act that would prohibit mutual funds from paying for the distribution of their shares with brokerage commissions. The SEC also sought comment on whether Rule 12b-1 should be further amended, including whether it should be repealed all together. Amended Rule 12b-1 would include the following provisions:

    Proposed Ban on Directed Brokerage

    Funds would be prohibited from compensating a broker-dealer for promoting or selling fund shares by directing brokerage transactions to that broker. The rule would also prohibit step-out and similar arrangements designed to compensate selling brokers for selling fund shares. The SEC requested comment on whether a disclosure-based alternative to a ban could adequately address the SEC’s concerns, or whether the SEC should revise the disclosure requirements and ban only certain types of arrangements under which brokerage commissions are used to finance distribution.

    Policies and Procedures

    Any fund (or its adviser) that directs any portfolio securities transactions to a selling broker-dealer would be required to implement policies and procedures designed to ensure that its selection of brokers to effect portfolio securities transactions is not influenced by considerations about the sale of fund shares. These procedures would have to be reasonably designed to prevent (1) the persons responsible for selecting broker-dealers to effect transactions in fund portfolio securities (e.g., trading desk personnel) from taking broker-dealers’ promotional or sales efforts into account in making those decisions, and (2) the fund, its adviser or principal underwriter from entering into any agreement under which the fund directs brokerage transactions or revenue generated by those transactions to a broker-dealer to pay for distribution of the fund’s shares. The fund’s board of directors, including a majority of its independent directors, would need to approve the policies and procedures. The SEC requested comment on certain aspects of this proposal, including:

    • Whether the SEC should adopt other measures to help the fund monitor the use of fund brokerage, such as (1) requiring the board to monitor the fund’s adherence to the policies and procedures, or to approve the allocation of brokerage, (2) requiring the fund’s adviser to report to the board on its decisions regarding brokerage allocation, or (3) requiring the board to take other measures to ensure that brokerage decisions are not influenced by brokers’ distribution efforts.
    • Whether the SEC should require a fund’s chief trading officer (or another official of the fund or its adviser) to certify periodically that the selection of brokers to execute the fund’s portfolio securities transactions was made without taking into account the brokers’ promotion or sale of shares issued by the fund or any other fund.
    • Whether the SEC should include a safe harbor in the rule for funds that execute portfolio securities transactions with a selling broker and, if so, what conditions should be included in the safe harbor.
    • The amounts charged and their effect on shareholder value would be completely transparent to the shareholder because the amounts will appear on the shareholder's account statements.
    • Existing shareholders would not pay the costs of selling shares to new fund shareholders.
    • Long-term shareholders would no longer, as a result of paying a share of 12b-1 fees over a lengthy period, pay amounts that exceed their fair share of distribution costs.
    • Help to eliminate the substantial conflicts of interest presented by the use of fund assets to pay for distribution.
    • Simplify investing in funds and eliminate many of the problems with fund sales practices as funds would no longer need to have separate classes of shares based on Rule 12b-1 fees, which many shareholders have found very confusing.

    General Request for Comment

     The SEC also requested comment on whether it should propose additional changes to Rule 12b-1 to address other issues that have arisen under the rule, or propose to rescind the rule all together. The SEC commented in the proposing release that the current practice of using 12b-1 fees as a substitute for a sales load is a substantial departure from the use of the rule envisioned by the SEC when the rule was adopted in 1980.

    The SEC indicated it would particularly like to receive comment on an approach which would refashion Rule 12b-1 to provide that funds deduct distribution-related costs directly from shareholder accounts rather than from fund assets. Under this approach, for example, a shareholder purchasing $10,000 of fund shares with a five percent sales load could pay a $500 sales load at the time of purchase, or could pay an amount equal to some percentage of the value of his or her account each month until the $500 amount is fully paid (plus interest). If the shareholder redeemed before the amount was fully paid, the proceeds of the redemption would be reduced by the unpaid amount. Any such account-based fees would be subject to NASD limitations.

    The SEC commented that this approach may have a number of advantages over current arrangements, including:

  • The amounts charged and their effect on shareholder value would be completely transparent to the shareholder because the amounts will appear on the shareholder's account statements.
  • Existing shareholders would not pay the costs of selling shares to new fund shareholders.
  • Long-term shareholders would no longer, as a result of paying a share of 12b-1 fees over a lengthy period, pay amounts that exceed their fair share of distribution costs.
  • Help to eliminate the substantial conflicts of interest presented by the use of fund assets to pay for distribution.
  • Simplify investing in funds and eliminate many of the problems with fund sales practices as funds would no longer need to have separate classes of shares based on Rule 12b-1 fees, which many shareholders have found very confusing.

    The SEC is also seeking comment on whether Rule 12b-1 should be eliminated all together. If it were eliminated, the SEC asked what the consequences would be for funds, fund shareholders, fund advisers, and brokers that sell fund shares and on the aggregate amount of shareholder expenses. The SEC also asked whether particular types of funds (e.g., newer or smaller funds) would be disproportionately disadvantaged and whether restrictions on the use of asset-based fees to ensure that distribution expenses are not improperly characterized (e.g., shareholder account servicing expenses) should also then be adopted.

    Comments must be received by the SEC on or before May 10, 2004.

    SEC Release No. IC-26356; File No. S7-09-04.

     
     



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

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

    SEC proposes 2% redemption fee for mutual funds

    March 5, 2004 3:00 PM
    On February 25, 2004, the Securities and Exchange Commission (“SEC”) voted to propose new Rule 22c-2 under the Investment Company Act of 1940 (the “1940 Act”). The rule would require most mutual funds to impose a 2% fee on the redemption proceeds of shares redeemed within five days of their purchase. The fee would be applied to shares held the longest period of time first (i.e., on a first-in, first-out basis). The rule would not apply to money market funds, exchange-traded funds or to mutual funds that expressly permit active trading and disclose the likely costs of such trading to the fund. The rule would also include de minimus and financial emergency exceptions. We will provide more information on the proposed rule in next week's edition of our Industry News Summary. (SEC Press Release, February 25, 2004).
     
     



    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.