Investment Management Industry News Summary - November 2009

Investment Management Industry News Summary - November 2009

Publications

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

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

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FASB Postpones Implementation of FAS 167 for Asset Managers

November 20, 2009 1:22 PM

FASB voted on November 11, 2009 to postpone implementation of FASB Statement No. 167 (“FAS 167”) for mutual funds, hedge funds, private equity funds, venture capital funds and money market mutual funds. The new effective date for FAS 167 with respect to such funds is expected to come in late 2010 when a joint project on consolidation accounting can be completed by FASB and the International Accounting Standards Board (“IASB”). FASB stated that deferral of the effective date would provide additional time for the IASB and FASB to resolve issues involving how to distinguish between a principal and agent relationship. Concerns had been raised that the implementation of FAS 167 as previously contemplated could reduce rather than increase the transparency of asset managers’ financial statements by requiring consolidation of certain of the funds they advise.

For more information, please see:

http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FActionAlertPage&cid=1176156542768

 
 
 

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

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

Treasury Office of Foreign Assets Control (“OFAC”) Issues Final Economic Sanctions Enforcement Guidelines

November 20, 2009 1:19 PM

The Economic Sanctions Enforcement Guidelines (“Guidelines”), which guide determinations of the appropriate enforcement response to an apparent violation of the U.S. economic sanctions enforced by the OFAC, took effect on November 9, 2009 as a final rule that replaces the interim final rule of September 2, 2008. The Guidelines make clear that U.S. entities are expected to maintain risk-based compliance programs which will be taken into consideration by OFAC when assessing the appropriate enforcement response to an apparent violation. As compared to the interim rule, the Guidelines clarify the importance that OFAC will place on cooperation as a factor in determining the appropriate enforcement response.

For more information, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9303

http://www.treas.gov/offices/enforcement/ofac/legal/regs/fr74_57593.pdf

 
 
 

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

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

President Obama Establishes Interagency Financial Fraud Task Force

November 20, 2009 1:16 PM

The establishment of a Financial Fraud Task Force (“Task Force”) by Executive Order of President Barack Obama was announced on November 17, 2009 as an interagency effort to investigate, prosecute and punish financial crimes, recover and return proceeds to victims, and eliminate discrimination in lending and financial markets. The Task Force will be led by the U.S. Department of Justice with a steering committee of representatives from the U.S. Department of Treasury (“Treasury”), U.S. Department of Housing and Urban Development and SEC. The Task Force will provide advice and recommendations to Attorney General Eric Holder and coordinate law enforcement efforts with state and local partners as well as federal agencies and regulatory authorities to restore consumers’ confidence in the securities and credit markets through the identification and elimination of financial fraud, including bank, mortgage, loan and lending fraud; securities and commodities fraud; retirement plan fraud; mail and wire fraud; tax crimes; money laundering; False Claims Act violations; unfair competition; discrimination in lending; and other financial crimes and violations.

For more information, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9310

http://www.treasury.gov/press/releases/tg409.htm

http://www.sec.gov/news/speech/2009/spch111709rsk.htm

 
 
 

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

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

Senator Dodd Releases Financial Regulatory Reform Bill

November 20, 2009 1:13 PM

On November 10, 2009, Senate Banking Committee Chairman Chris Dodd released a discussion draft of financial regulatory reform legislation (the “Senate bill”). The House Financial Services Committee led by Congressman Barney Frank has also proposed a financial regulatory reform package composed of multiple discrete bills (together, the “House bill”). The Senate bill raises the threshold at which registration with the SEC as an investment adviser becomes required, from $25 million in assets under management (“AUM”) to $100 million in AUM, with the result of substantially increasing the percentage of advisers regulated by the states. The House bill exempts from registration all venture capital fund advisers, but appears to require the registration of all advisers to hedge funds and private equity funds with AUM of at least $150 million. The Senate bill requires the registration of hedge fund advisers, but not private equity fund advisers or venture capital fund advisers. “Family offices” that offer investment management and other services to family members are also exempted from registration under the House bill. Definitions for each type of adviser remain to be developed by the SEC. In contrast to the House bill, the Senate bill eliminates the broker-dealer exemption under the Investment Advisers Act of 1940 (“Advisers Act”), with the result that broker-dealers providing investment advice would be required to register as investment advisers. Such broker-dealers would become subject to the fiduciary standard and principal trading rules of the Advisers Act.

For a summary of the Senate bill by Senator Dodd, please see:

http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf

For a summary of the House bill, please see:

http://www.wilmerhale.com/publications/periodicals/investment_management/blog.aspx?entry=2785

 
 
 

 
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.

Director Donohue Warns Independent Directors About Takeover Defenses

November 20, 2009 11:58 AM

SEC Investment Management Division Director Andrew Donohue cautioned independent directors at the Investment Company Directors Conference on November 12, 2009 to be vigilant against potential harms to shareholders that result from the adoption of takeover defenses that entrench a fund’s management. Director Donohue noted as examples, the imposition of caps on the percentage vote allotted to any given shareholder, irrespective of such shareholder’s actual percentage ownership, and poison pills adopted by closed-end funds, whereby rights to purchase additional shares at par rather than net asset value are distributed to all but one shareholder upon its percentage ownership crossing a given threshold. He stated that, even where authorized under state law, these and other takeover defenses may be inconsistent with shareholders’ best interests and federal law, including Sections 18(d) and 23(b) of the Investment Company Act of 1940. He encouraged independent directors, especially those of closed-end funds, to remain on guard against such takeover defenses that have the effect of entrenching a fund’s management at the expense of its shareholders.

For more information, please see:

http://www.sec.gov/news/speech/2009/spch111209ajd.htm

 
 
 

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

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

Director Khuzami Describes Insider Trading at Hedge Funds as Systemic

November 20, 2009 11:55 AM

On November 13, 2009, SEC Enforcement Director Robert Khuzami stated that recent insider trading cases reflected systemic misconduct at hedge funds. He described the current manifestations of insider trading as potentially more dangerous than past instances, which he viewed as opportunistic rather than an acknowledged “business model” based upon collecting information from corporate insiders. Director Khuzami’s remarks followed his November 5, 2009 announcement of two new sets of civil charges, brought against thirteen more individuals involved in a $33 million insider trading ring exposed in October 2009 and nine individuals in a newly discovered $20 million scheme.

For more information, please see:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_eFjxnYFzxI

http://sec.gov/news/speech/2009/spch110509rk.htm

 
 
 

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

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

Supreme Court Hears Oral Arguments in Jones v. Harris

November 13, 2009 8:56 AM

On November 2nd, the Supreme Court heard arguments in Jones v. Harris. The petitioner contends that an investment adviser violates Section 36(b) of the 1940 Act when its fees for managing a registered investment company exceed those which it charges for institutional separate accounts. David Frederick argued on behalf of the petitioner, Curtis Gannon, Assistant to the Solicitor General, argued on behalf of the United States as amicus curiae supporting the petitioner, and John Donovan, Jr. argued on behalf of the respondent.

For a summary of the argument, please see:

http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9299

For a copy of the transcript, please see:

http://www.supremecourtus.gov/oral_arguments/argument_transcripts/08-586.pdf

 
 
 

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

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

Division of Investment Management Grants No-Action Relief to Registered Investment Companies Purchasing Interests in Private Fund Participating in TALF

November 13, 2009 8:50 AM

On October 8th, the staff of the Division of Investment Management agreed not to recommend enforcement action under Section 17(a) or 17(d) of the 1940 Act or Rule 17d-1 thereunder if a family of registered investment companies, as well as institutional separately managed accounts and common trust funds, invest in a private fund managed by their investment adviser or subadviser. The private fund will be organized for the specific purpose of acquiring eligible collateral and obtaining loans under the U.S. Department of Treasury’s Term Asset-Backed Securities Loan Facility (“TALF”). The investment companies will not be required to obtain an order from the SEC pursuant to Section 17(b) of the 1940 Act or Rule 17d-1 thereunder.

The registered investment companies hold or may acquire securities eligible to be used as collateral under the TALF program (including certain asset-backed securities and commercial mortgage-backed securities), but many do not hold the minimum $10 million to participate in the TALF program. They will contribute cash or eligible securities in exchange for interests in a private fund that will qualify as an “eligible borrower” under the TALF program and will rely on Section 3(c)(1) or 3(c)(7) of the 1940 Act. The private fund and will limit its activities to acquiring eligible securities, obtaining TALF loans by using the eligible securities as collateral, investing in derivatives for hedging purposes, and entering into repurchase and reverse repurchase agreements to facilitate securities settlements. The entities seeking relief represented that the investments in the private fund would be subject to certain conditions, including the following:

• The adviser will determine whether an investment in the private fund is appropriate for each registered investment company on an individual basis, and the board of any investment company advised by the private fund’s manager must approve the investment in advance, including a majority of the independent members.

• Each registered investment company advised by the private fund’s manager must have an operating policy that restricts it from purchasing additional securities to the extent it has borrowed more than 5% of its assets, but the private fund’s borrowing of a TALF loan will not be subject to this policy.

• Each registered investment company may not invest more than 5% of its total assets in the private fund or more than 10% of its total assets in the private fund, any investment vehicle relying on Section 3(c)(1) or 3(c)(7) of the 1940 Act and direct investments in TALF loans. No single investor in the private fund may hold 25% or more of the total value of interests in the private fund.

• The interests in the private fund will have identical rights and obligations, will be sold in a single offering at the same net asset value per share determined in accordance with the private fund’s policies and procedures, and will be subject to the same terms and conditions.

• The private fund and registered investment companies advised by the private fund’s manager will have the same pricing procedures based on objective and verifiable valuation measures to determine their net asset values and the value of any eligible securities transferred to the private fund. Additionally, the value of any eligible securities contributed to the private fund must be materially consistent with the value that the administrator and custodian for the TALF program would ascribe to the securities in the event the securities are posted as collateral for a TALF loan.

• Interests in the private fund will be sold without a sales load or similar charges. The adviser will not receive a separate management fee or any incentive fee for managing the private fund, so the registered investment companies will not pay more management fees than they would pay if they did not hold private fund interests. The private fund’s organizational and ongoing operating expenses will be charged to its investors on a pro rata basis.

• Interests in the private fund will be non-transferable and non-redeemable and generally may not be repurchased by the private fund during the term of the fund. Any distributions and liquidation payments will be made to interest holders pro rata at the same time in cash, and the private fund will not charge redemption, repurchase or similar fees in connection with the fund’s liquidation.

• The adviser and its affiliates will not invest in the private fund, except to provide seed capital.

• The private fund will make available information about the private fund’s portfolio investments to the same extent as if the investment company held the portfolio investments directly.

• The private fund will behave as if it were subject to certain sections of the 1940 Act that apply to registered closed-end investment companies.

Surprisingly, the staff stated that the position expressed in this letter applies only to the entities seeking relief, and no other entity may rely on the position. The staff did not explain why it chose to address this request by no-action letter, rather than an exemptive order.

For copies of the letters, please see:

http://www.sec.gov/divisions/investment/noaction/2009/troweprice100809.htm

http://www.sec.gov/divisions/investment/noaction/2009/troweprice100809-incoming.pdf

 
 
 

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

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

SEC Institutes Proceedings Against General Counsel of Dually Registered Broker-Dealer and Investment Adviser for Failure to Supervise Registered Representative

November 13, 2009 8:46 AM

On October 19th, the SEC issued an order instituting administrative proceedings against an individual who served as the general counsel, member of the board of directors, member of the credit committee, and supervisor of the compliance department for a dually registered investment adviser and broker-dealer. In a separate action, a registered representative of the firm, one of his customers, and a registered representative at another firm pled guilty to violations of Section 10(b) of the Exchange Act by manipulating the market for the stock of a company from at least August 2002 through November 2005. The SEC also issued an order finding that the firm failed reasonably to supervise the representative and failed to file Suspicious Activity Reports regarding his conduct.

The order alleged that from 2003 through 2005, the general counsel failed reasonably to supervise the representative with a view to detecting and preventing his violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by failing to respond reasonably to red flags. Among other things, the general counsel: (1) approved the representative’s hiring knowing that he had ten customer complaints on his Form U-4; (2) allowed the representative to continue to work at a different location several days a week for several months under a special arrangement with the firm, even after compliance and supervisory concerns were raised; (3) had many conversations with the firm’s compliance officers and other personnel about concerns that the representative was manipulating the company’s stock; (4) received several memoranda and e-mails discussing evidence that the representative engaged in manipulative, unsuitable or unauthorized trading and was not being supervised properly; (5) did not inform the representative’s new branch manager or new compliance officers regarding these issues; and (6) did not place the representative under special supervision in 2003 and did not terminate him in December 2004. The SEC alleged that the general counsel was a supervisor of the registered representative because he had the requisite degree of responsibility, ability or authority at the firm to affect the representative’s conduct.

The SEC will schedule a hearing before an administrative law judge to determine whether the SEC’s allegations are true and what remedial action is appropriate under Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act. The SEC typically has brought failure to supervise cases against persons with direct supervisory authority, although it has brought a few cases against “non-line” personnel, such as in-house counsel.

For more information, please see:

http://www.sec.gov/litigation/admin/2009/34-60837.pdf

 
 
 

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

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

SEC Settles Action Against Investment Adviser, Broker-Dealer and Two Senior Officers for Commission Recapture Program

November 13, 2009 8:43 AM

On November 4th, the SEC announced that it settled an action against an investment adviser, its wholly-owned broker-dealer, and two of its senior officers for charging mutual funds that the adviser managed over $24 million in brokerage commissions as part of a commission recapture program. The SEC alleged that from 1986 to November 2004, the respondents arranged for unaffiliated brokers execute, clear and settle trades for the funds at discounted commission rates of $0.01 to $0.02 per share. The respondents allegedly instructed the brokers to charge the funds $0.488 per share and rebated $0.288 to $0.0388 per share to the adviser’s affiliated broker-dealer rather than passing the discount to the funds. The SEC alleged that the affiliated broker did not provide any brokerage services to the funds. The SEC alleged that the respondents did not fully disclose the commission recapture program to the funds’ independent trustees or shareholders, and falsely represented that using the affiliated broker for trades was consistent with the adviser’s best execution obligations and served the best interests of the funds and their shareholders. The respondents also allegedly failed to disclose that the unaffiliated brokers provided all of the brokerage services in connection with the funds’ trades, the unaffiliated brokers charged lower commissions to execute the funds’ trades but were directed to charge the funds higher commissions and pay the balance to the affiliated broker, and respondents required target percentages ranging from approximately 50% to 70% of the funds’ trades to be allocated to the recapture program.

The SEC’s order found that the adviser, broker-dealer, and two of their officers violated Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The SEC also found violations of Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 (“Advisers Act”) and Sections 15(c), 17(e)(1) and 34(b) of the Investment Company Act of 1940 (“1940 Act”). Without admitting or denying the SEC’s findings, the adviser, broker-dealer, and officers agreed to the issuance of an administrative order including censures and an order to cease and desist from violating those provisions. The SEC ordered the adviser to pay $24,168,979 in disgorgement, $9,536,786 in prejudgment interest and a $10 million penalty, and the officers to pay penalties of $1 million and $250,000. The officers also were barred from association with any broker, dealer, investment adviser, and investment company, and from acting as an officer or director of a public company.

For more information, please see:

http://sec.gov/news/press/2009/2009-234.htm

http://sec.gov/litigation/admin/2009/33-9081.pdf

 
 
 

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

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