Investment Management Industry News Summary - October 2000

Investment Management Industry News Summary - October 2000

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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SEC Adopts Amendments to Options Disclosure Rule

October 23, 2000 2:04 PM
The SEC has adopted amendments to Rule 9b-1 under the 1934 Act. Rule 9b-1 governs the information to be included in, and the filing and dissemination of, an options disclosure document. The SEC first proposed amendments to Rule 9b-1 in June 1998 and has adopted the amendments as proposed. The amendments are designed to help ensure that the Rule addresses the evolving nature of the markets for standardized options.

In general, Rule 9b-1: (i) specifies when a self-regulatory organization is required to file an options disclosure document ("ODD") with the SEC; (ii) itemizes the information required to be contained in the ODD; (iii) describes the SEC's process for reviewing a preliminary ODD; and (iv) establishes the obligations of broker-dealers to furnish the ODD prior to approving a customer's account for trading in options. Rule 9b-1 provides that an ODD must be filed with the SEC by an options market at least 60 days prior to the date definitive copies of the document are furnished to customers. With respect to options classes covered by the ODD, the document must contain, among other things, a discussion of the mechanics of buying, writing, and exercising the options; the risks of trading the options; the market for the options; and a brief reference to the transaction costs, margin requirements, and tax consequences of options trading. Further, the Rule provides that no broker or dealer shall accept an option order from a customer, or approve the customer's account for the trading of options, unless the broker or dealer furnishes or has furnished to the customer the options disclosure document.

The amendments revise the definition of "options disclosure document," to clarify that amendments and supplements to the ODD are included as part of the ODD and must be delivered to customers. The SEC noted that new financial products have been introduced into the standardized options market and descriptions of these products are often initially incorporated into the ODD through a supplement and delivered to the customer along with the bound ODD. In addition, the amendments conform the definition of "definitive options disclosure document" to Rules 134a and 135b under the Securities Act of 1933 (the "1933 Act"). Rule 134a provides that written materials related to standardized options will not be deemed a prospectus for purposes of Section 2(10) of the 1933 Act provided that, among other conditions, such materials are limited to explanatory information describing the general nature of the standardized options markets. Rule 135b provides that, for purposes of Section 5 of the 1933 Act, materials meeting the requirements of Rule 9b-1 of the 1934 Act will not constitute either an offer to sell or an offer to buy any security. The amendment also adds a requirement that the ODD discuss the "mechanics of exercising" options and the risks of "being a holder or writer" of options. The SEC noted that these amendments are intended to make it clear that the exchanges are not required to provide information to customers through the ODD on how to trade options, such as information regarding investment strategies. The SEC has also made several technical amendments to the Rule. The effective date of the amended Rule 9b-1 will be 30 days after its publication in the Federal Register.SEC Release No. 34-43461 (October 19, 2000)
 
 



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

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

Staff Issues Guidance on Staff Accounting Bulletin No. 101

October 23, 2000 8:33 AM
The staff has issued guidance on Staff Accounting Bulletin No. 101 ("SAB 101") (concerning revenue recognition) in a question and answer format. The staff issued SAB 101 on December 3, 1999 in order to summarize in one location the existing guidance on revenue recognition and make that guidance more accessible to registrants and their auditors. The Staff Accounting Bulletins do not represent rules of interpretations of the SEC but the interpretations and practices followed by the Division of Corporate Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws. The staff has also deferred the implementation date of SAB 101 until no later than the fourth quarter of registrant's fiscal years beginning after December 15, 1999.

In issuing the bulletin, the staff noted that a significant portion of fraudulent financial reporting involves improper revenue recognition. Further, the staff noted that improper revenue recognition in recent years has been the reason for most restatements of financial information. The staff noted that since the issuance of SAB 101, it has received inquiries from auditors, tax preparers, and analysts about how the guidance in SAB 101 would apply to particular actions. The question and answers released by the staff cover eight main topics: (1) transfer of title, (2) substantial performance and acceptance, (3) nonrefundable payments, (4) accounting for certain costs of revenues, (5) refundable fees for services, (6) estimates and changes in estimates, (7) fixed or determinable fees, and (8) implementing the guidance in SAB 101. The guidance also includes an exhibit which presents several examples showing the effects of customer acceptance and unfulfilled obligations on revenue recognition.

With respect to implementing the guidance set forth in SAB 101, the staff noted that Accounting Principals Board ("APB") Opinion No. 20 does not permit restatement of financial statements for a change in accounting principals that does not represent the correction of any error, except in very rare circumstances. An exception would be for companies that are filing publicly for the first time. As noted in APB Opinion No. 20, those companies are permitted to reflect the adoption of the new policy via restatement, which the staff believes is usually necessary to avoid confusing investors. Staff Accounting Bulletin No. 101, Revenue Recognition and Financial Statements - Frequently Asked Questions and Answers. (October 12, 2000)
 
 



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 Staff Releases Interpretive Guidance for Regulation FD

October 23, 2000 8:26 AM

The staff has supplemented its Telephone Interpretations Manual to include some frequently asked questions about Regulation FD. Regulation FD (Fair Disclosure), which became effective on October 23, 2000, is the new issuer disclosure rule that addresses selective disclosure. The new supplement, along with the SEC's Telephone Interpretations Manual, can be found on the SEC's website at http://www.sec.gov/. The staff provided the following guidance when responding to 15 questions in the supplement:

  • Confirming forecasts: An issuer can confirm selectively a forecast that it previously made to the public without triggering the Rule's public reporting requirements. The staff cautioned, however, that the issuer should consider whether the confirmation conveys any information above and beyond the original forecast and whether additional information is itself material. The SEC also noted that a statement by an issuer that it has "not changed" or that it is "still comfortable with" a prior forecast is no different than a confirmation of a prior forecast. When asked about a prior forecast, the SEC stated that if the issuer does not want to confirm it, it may simply say "no comment." An issuer may refer to a prior forecast without confirming it by making it clear that the prior estimate was of the date of which it was given and it is not being updated as of the time of subsequent statement.
  • No new duty to update: Regulation FD does not change existing law with respect to any duty to update information.
    Notice for conference calls: An adequate advance notice for a conference call to make public disclosure of material non-public information must include the date, time and call-in information for the conference call. The staff commented that the public notice should be provided at a reasonable time ahead of the conference call and that, if a transcript or reply of the conference call will be available afterwards, issuers should indicate in the notice how, and for how long, such a record will be available to the public.
  • Shareholder meetings: An issuer would not be able to satisfy Regulation FD's public disclosure requirement by disclosing material non-public information at a shareholder meeting that is open to all shareholders but not to the public.
  • Other SEC filings to provide disclosure: A Securities Exchange Act of 1934 (the "1934 Act") filing other than a Form 8-K, such as a Form 10-Q or proxy statement, can constitute public disclosure provided that it is made within the time frames that Regulation FD requires. The staff noted that in considering whether the disclosure is sufficient, the issuer must not bury the information or make the disclosure in a piece-meal fashion throughout the filing.
  • Filing date of reports: Prior to making disclosure to a selective audience, an issuer need only confirm that the 1934 Act filing or furnished report has received a filing date that is no later than the date of the selective disclosure.
  • Commenting on analyst's model: An issuer can review and comment privately on an analyst's model without triggering Regulation FD's disclosure requirements provided the issuer does not communicate material non-public information. For example, an issuer ordinarily would not be conveying material non-public information if it corrected historical facts that were a matter of public record or if it shared seemingly inconsequential data which, when pieced together with public information by a skilled analyst with knowledge of the issuer and the industry, helps form a mosaic that reveals material non-public information.
  • When is disclosure intentional: A disclosure would be considered to be "intentional" under Regulation FD when the person making it either knows, or is reckless in not knowing, that the information he or she is communicating is both material and non-public. A CEO who discloses material non-public information even though he did originally not plan to make that disclosure would be making an intentional disclosure under Regulation FD.
  • Confidential provision of information to analysts: An issuer may provide material non-public information to analysts as long as the analysts expressly agree to keep the information confidential until the information is public.
    Maintaining the confidential information: When an analyst agrees to maintain the information confidential, the issuer does not need to require the analyst also to sign an agreement that he/she will not trade on the information in order to rely on the exclusion in Regulation FD. The SEC noted that an express agreement to maintain the information in confidence is sufficient. The staff further noted that if the analyst then trades or advises others to trade, he or she could face insider trading liability.
  • Relying on confidentiality agreement: If an issuer wishes to rely upon the confidentiality agreement exclusion of Regulation FD, the recipient must expressly agree to keep the information confidential.
  • Road show materials: Road show materials used in connection with registered public offering do not need to be disclosed under Regulation FD. The staff noted that any disclosure made "in connection with" a registered public offering of the type excluded from Regulation FD is not subject to Regulation FD. All other road shows are subject to Regulation FD in the absence of another applicable exclusion.
  • Disclosure to employees: An issuer can disclose material non-public information to its employees (who may also be shareholders) without making public disclosure of the information. Regulation FD does not apply to communications of confidential information to employees of the issuer. The staff noted that an issuer's officers, directors and other employees are subject to duties of trust and confidence and would face insider trading liability if they were to trade or tip others.
  • Unauthorized senior official disclosure: If an issuer has a policy which limits which senior officials are authorized to speak to certain persons, disclosures by senior officials not authorized to speak under the policy would not be subject to Regulation FD. The staff noted that selective disclosures of material non-public information by senior officials not authorized to speak to the persons may trigger liability under insider trading law.
  • Road shows during private placement: A resale registration statement filed after completion of a private placement would not effect whether disclosure at the road shows conducted during the private placement would be covered by Regulation FD. Road shows conducted in connection with an offering by an issuer that is not registered would not be excluded from Regulation FD because they would not be made "in connection with" a registered public offering of the type excluded from Regulation FD.
 
 



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 Reaffirms Effective Date of Regulation FD

October 16, 2000 12:16 PM
In a letter to the National Investor Relations Institute ("NIRI"), the SEC reaffirmed the October 23, 2000 effective date of Regulation FD. The SEC also reminded issuers of the staff's availability to offer interpretive guidance, both before and after Regulation FD becomes effective.

Regulation FD (Fair Disclosure) is a new issuer disclosure rule that addresses selective disclosure. The Regulation provides that when an issuer, or person acting on its behalf, discloses material non-public information to certain enumerated persons (such as, securities market professionals and holders of the issue's securities who may well trade on the basis of the information), it must make public disclosure of that information. Timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional. For an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the Regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to affect a broad, non-exclusionary distribution of the information to the public. (See Industry News Summary for the week of 12/13/99 to 12/20/99).

The NIRI had submitted a letter to the SEC seeking a delay in the effective date of Regulation FD until December 29, 2000. The NIRI commented that companies wishing to comply with Regulation FD for their third quarter analyst conference calls may not be able to web cast their conferences or may have to delay the release of their earnings because of troubles reserving web casting facilities due to unprecedented high demand. The NIRI commented that additional time would enable service providers to provide the capacity that is needed for the widespread decimation of company conferences. The NIRI also sought the extension to give companies time to review the yet to be released list of answers to frequently asked questions about Regulation FD that is being prepared by the SEC.

SEC Today (October 12, 2000)
 
 



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.

NASD Submits Amendment to Earlier Hot Issue Rule Proposal to SEC

October 16, 2000 10:08 AM

On October 10, 2000, NASD Regulation ("NASDR") filed an amendment to proposed Rule 2790, Trading in Hot Equity Offerings, with the Securities and Exchange Commission ("SEC"). Proposed Rule 2790 would change the way the NASDR regulates trading in equity offerings. These amendments, which are intended to respond to several comments received concerning the earlier proposal, change both the scope of persons and the type of securities covered by the proposed Rule and the treatment of issuer-directed share programs under the Rule.

The NASDR had originally filed proposed Rule 2790 with the SEC on October 15, 1999. The SEC received 24 comment letters, with the commentators generally noting that the proposed Rule change was a significant improvement over the NASDR's Free-Riding and Withholding Interpretation (the "Interpretation"). The amendments change the proposed Rule as follows:

  • Scope of securities covered: In the October 1999 filing, the NASDR defined a "hot issue" as a security that is part of a public offering if the volume weighted price during the first 5 minutes of trading in the secondary market was 5% or more over the public offering price. The NASDR has amended the proposed Rule to cover all initial equity public offerings, not just those that open above a certain premium. The NASDR commented that this approach would avoid many of the complexities associated with canceling and reallocating the sale of an IPO to a non-restricted person in the event that an offering unexpectedly becomes a hot issue.
  • Secondary offerings: The NASDR is proposing to exempt all secondary offerings from the proposed Rule. The NASDR had originally removed the exemption for secondary offerings on the premise that the decision to adopt the 5% threshold premium for hot issues would in itself exempt secondary offerings from application of the Rule. However, without the 5% threshold premium, the NASDR believes that reinstating the exemption for secondary offerings is now appropriate. The NASDR commented that it has observed that secondary offerings rarely, if at all, trade at a significant premium to the public offering price.
  • IPOs with insufficient investor demand: The NASDR is proposing to add provisions to address circumstances where purchases by restricted persons are necessary for the successful completion of an offering. Specifically, the proposed Rule change states that nothing in the Rule shall prohibit an underwriter, pursuant to an underwriting agreement, from placing a portion of a public offering in its investment account when it is unable to sell that portion to the public.
  • Other categories of offerings not covered by the proposed Rule change: First, the NASDR recommends exempting public offerings of investment grade asset-backed securities as defined in SEC Form S-3, some of which may otherwise fall within the definition of "new issue". Second, NASDR recommends exempting convertible securities. The NASDR found that in light of the Interpretation's current exclusion for debt securities in secondary offerings, the failure to exclude convertible securities led to an anomalous result. Third, the NASDR recommends exempting preferred securities. The NASDR commented that it believes that preferred securities exhibit pricing and trading behavior that more closely resembles debt than equity securities. Fourth, the NASDR recommends exempting offerings of closed-end investment companies from the restriction of the Rule. The NASDR noted that closed-end fund offerings typically commence at the public offering price, and that if there is a premium, it would be a very small premium. Fifth, the NASDR has amended the proposed Rule change to exclude from the definition of public offering, exchange offers, rights offerings, and offerings made pursuant to a merger acquisition.
  • Portfolio fund managers: Based upon numerous comments, the NASDR has amended the restriction on portfolio managers. The amendment treats a portfolio manager and certain members of his or her immediate family as restricted persons other than with respect to a beneficial interest in the bank, savings and loan institution, insurance company, investment company, investment adviser, or collective investment account, over which such person has investment authority. The amendment thus permits a hedge fund manager who is not otherwise restricted to invest in IPOs through a fund he or she manages. Under the amendment, however, a portfolio manager may not purchase IPOs in his or her personal accounts. The amendments do not, however, define what constitutes a personal account of a portfolio manager. NASDR believes that a number of factors will contribute to a determination as to whether an account is a personal account, including: the number of beneficial owners in the account, the identity of the participants, whether the account participants are members of the portfolio manager's immediate family, the compensation scheme, the manner in which profits and losses are distributed, the expectation of the account participants, and the overall trading activity of the account. Despite this change, NASDR does not believe that the treatment of portfolio managers in the amendment would lead to an environment that is significantly different from that under the current Interpretation. Under the Interpretation, portfolio managers are entitled to purchase hot issues if such purchases are, among other things, consistent with their normal investment practices. They are also entitled to receive benefits from new issues and accounts they manage in the form of performance fees.
  • Precondition for sale/documentation: The proposed Rule change streamlines the requirements for members to demonstrate that sales of IPOs were made in conformity of the Rule. The proposed Rule provided for a representation from the account holder, or a person authorized to represent the beneficial owners of the account, that the account is eligible to purchase new issues in compliance with the Rule. In response to several comments, the NASDR intends to state in a Notice to Members that an annual mailing to account holders is not required by members and that oral or electronic communications are permitted so long as such communications and the responses are documented internally by the member firm. The NASDR also is maintaining the interval required for verification of one year. A member may not rely on a representation that it has reason to believe is inaccurate. Members may also use negative consent letters in all but the initial account verification.
  • De minimus exception: The NASDR is maintaining the diminimus level at 5%. (i.e., a collective investment account that is owned 5% or less by restricted persons would not be required to create a segregated account for the restricted persons when purchasing new issues). The NASDR has also revised the de minimus exemption to impose a strict numerical limit of 100 shares on the number of shares that any one person can purchase under the de minimus exemption. Complying with the 100 share limit, members must look through an investing entity to a person's beneficial interest. The de minimus exemption also requires that a restricted person does not manage or otherwise direct investments in the account. The NASDR noted that the de minimus exemption does not allow restricted persons to purchase 100 shares directly.
  • Owners of brokers/dealers: The NASDR substantially revised the restrictions on owners of broker/dealers. The October 1999 filing treated as restricted persons affiliates of a broker/dealer and natural persons, and certain members of their immediate family, who own 10% or more, or contributed 10% or more of the capital, of the broker/dealer. The amendment treats, as restricted persons, the owners of broker/dealers as defined in Schedule A of Form BD, with at least 10% ownership interest, and as defined in Schedule B of Form BD. The NASDR believes that this approach is desirable from a compliance perspective because the definitions are understood by members and the information is already required to be maintained. The net effect of these provisions is that both upstream and downstream affiliates, including sister companies, are considered restricted persons. The proposed Rule exempts sales to and purchases by nearly all publicly traded companies listed on a national securities exchange or traded on the Nasdaq national market, even those that are affiliates of a broker/dealer (but not a broker/dealer itself). The exemption further requires that the gains or losses from the IPOs must be passed on to shareholders. The amendment also contains an exemption for the purchase of new issues by a bank, trust fund, or insurance company, general or separate investment account, provided that the account has investments from 1,000 or more investors, is not limited principally to restricted persons.
  • Beneficial interests definition: The NASDR is revising the definition of "beneficial interest" which was defined in the October 1999 filing as "any ownership or other direct financial interest." Under the amended proposed Rule, "beneficial interest" is defined more broadly as "any economic interest, such as the right to share in gains or losses".
  • Issuer-directed share programs: The amendment proposes to exempt IPO shares that specifically are directed by the issuer to such persons as employees, directors and friends and family of the issuer. The NASDR believes, however, that whether directed by the issuer or otherwise, broker/dealers and their personnel and their immediate family, and certain persons acting as finders or in a fiduciary capacity to the managing underwriter, should not purchase IPOs, unless such persons are employees or directors of the issuer, the issuer's parent or a subsidiary of the issuer or members of the immediate family of an employee or director of the issuer. The NASDR also believes that the issuer-directed exemption should only apply when the shares are in fact directed by the issuer.
  • Limited business broker/dealers: The proposed Rule change does not apply to persons associated with a limited business broker/dealer. The proposed Rule defined the limited business broker/dealer as a broker/dealer whose authorization to engage in the securities business is limited solely to the purchase and sale of investment company/variable contracts securities and direct participation program securities. The amendments have not changed the scope of this exemption.
  • Elimination of conditionally restricted persons: The amendment continues to treat persons as either restricted or non-restricted.
  • ERISA Plans: The NASDR has further simplified the restrictions on the ERISA plans. The amendment exempts an ERISA plan that is qualified under Section 401(a) of the Internal Revenue Code, provided that such plan is not sponsored solely by a broker/dealer.
  • Foreign investment companies: The October 1999 filing proposed an exemption for foreign investment companies that is substantially similar to the Interpretation. Specifically, a foreign investment company would have been exempt from the proposed Rule change if: (1) it has 100 or more investors; (2) it is listed on a foreign exchange or authorized for sale to the public by a foreign regulatory authority; (3) no more than 5% of its assets are invested in the particular hot issue; and (4) no person owning more than a 5% interest in such company is a restricted person. The NASDR has simplified the exemption by eliminating the 100 person requirement and the 5% limitation on the size of the purchase in relation to the size of the investment company.

File No. SR-NASD-99-60 (October 10, 2000).

 
 



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 Proposed New Rule and Rule Amendments for Cancelled Securities Certificates

October 9, 2000 10:54 AM

The SEC has proposed new rules and rule amendments to improve the processing of securities certificates by transfer agents. Proposed Rule 17A(d)-19 under the Securities Exchange Act of 1934 (the "Exchange Act") would require every transfer agent to establish and implement written procedures for the cancellation, storage, transportation and destruction of securities certificates. The SEC has also proposed rule amendments to make it clear that Rule 17f-1, which governs lost and stolen securities, and Rule 17A(d)-12, which governs transfer agent safe keeping, apply to cancelled certificates.

The SEC noted that these proposals are designed to address the problem that, until properly destroyed, cancelled securities certificates can resurface in the marketplace and be used to defraud members of the public or financial institutions. The SEC cited several examples where cancelled securities certificates were stolen as they were being transferred from the transfer agent to a certificate destruction vendor. In a 1992 case, approximately $111 billion in face amount of cancelled bond certificates disappeared and in 1994 approximately $6 billion in face amount of cancelled bond certificates disappeared. The SEC commented that the bulk of these cancelled certificates still remains unaccounted for and continues to resurface in the marketplace to defraud many banks, brokers and individuals through sales of the cancelled certificates for cash or use as loan collateral. The SEC noted that a common transfer agent practice has contributed to this problem. In physically canceling certificates, many transfer agents mark the certificate only with pin-hole size perforations. These tiny perforations are used to avoid defacing the certificates and impairing their usefulness as records, but are often barely noticeable. Even more problematic was the practice by some transfer agents of not marking certificates at all to indicate that the certificates have been cancelled. To address these problems, the SEC has proposed Rule 17A(d)-19 which would require each transfer agent to:

  • Have a written statement setting forth its procedures for the cancellation, storage, transportation and destruction of securities certificates;
  • Clearly apply to the face of each cancelled certificate the word "Cancelled" unless the transfer agent's procedures will cause the certificate to be destroyed in accordance with other SEC rules within 72 hours of its cancellation;
  • Transport cancelled certificates in a secure manner with a record of the certificates in transit;
  • Witness and document the destruction of certificates; and
  • Keep a retrievable electronic record of each cancelled certificate with identifying data.

The Rule would authorize the SEC to provide exemptions from these provisions in appropriate cases upon written request, such as where a transfer agent lacks any automated capability or where a transfer agent uses an electronic storage media to image certificates and then immediately destroys the certificates pursuant to Exchange Act rules. The SEC is also amending Rule 17A(b)-7(i) to require transfer agents to maintain records to demonstrate compliance with these requirements for not less than three years with the first year in an easily accessible place.

The SEC is also proposing amendments to Rule 17f-1 under the Exchange Act. Rule 17f-1 governs operation of the SEC's lost and stolen securities program (the "Program"). The Program consists mainly of a data base for securities that are reported lost, stolen, missing or counterfeit. Most financial institutions are required to participate in the Program and must report any securities that are discovered to be lost, stolen, missing or counterfeit. Financial institutions also must inquire about any securities certificate valued at $10,000 or more that comes into their possession or keeping. The Program is operated under contract with the SEC by the Securities Information Center located in Boston. The SEC has proposed to amend Rule 17f-1(a) to clarify that Rule 17f-1 covers the security certificate from the time it is printed by the issuer until the time it is destroyed. The SEC is also proposing to amend Rule 17f-1 to add a definition of the term "missing". Under the amendment, the term "missing" is defined as "any certificate that cannot be located but which is not believed to be lost or stolen, and to any certificate that the transfer agent believes was destroyed, but was not destroyed according to the certificate destruction procedure required by proposed Rule 17A(d)-19(c).

Proposed Rule 17f-1(c)(2)(i) would require transfer agents to track shipments of securities certificates, including cancelled certificates, between reporting institutions. When a shipment becomes unaccounted for, the delivering institution would be required to timely investigate and take reasonable steps to determine the facts. If the certificates cannot be located, the delivering institution must report to the Program that the certificates are missing, stolen or lost and must do so within a reasonable time not exceeding 10 business days after the shipment was sent. The comment period for the proposal will remain open for 60 days from the date of publication in the Federal Register. SEC Release No. 34-43401 (October 2, 2000).

 
 



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.

Stock Markets Agree to Distinguish After-Hours and Regular Session Trades with "T" Modifier

October 9, 2000 10:03 AM

On October 4, 2000, the SEC announced that the stock markets that comprise the Consolidated Tape Association ("CTA") have agreed to implement a plan to help investors distinguish after-hours and regular session stock trades. The CTA acts as the central distributor of the consolidated tape, which is a high-speed, electronic system that constantly reports the latest price and volume data on sales of exchange-listed stocks. The data reflected on the consolidated tape arrives from various market centers, including all securities exchanges, electronic communication networks, and other broker-dealers. The Nasdaq stock market runs a similar tape for its securities. The SEC noted that over the last year, it has received a number of complaints from investors and issuers about confusing end-of-day securities prices. The SEC noted that this confusion has arisen from inconsistencies among market data vendors and the media concerning when they take the end-of-day "snap shots" of stock prices. For example, some snap shots have reflected prices shortly after the end of the regular trading session at 4:00 p.m. (eastern time), while others have used prices at various times until the end of the consolidated tape operations at 6:30 p.m. (eastern time). The CTA has implemented two initiatives to assist vendors and the media in distinguishing after-hours and regular session stock prices:

  • The CTA has begun to issue a daily 4:15 p.m. (eastern time) market summary that more accurately reflects regular session stock prices. This summary gives a "snap shot" of the market shortly after the end of the regular trading session which is the period in which more than 97% of the day's trading occurs. By using the prices in the market summary, vendors and the media can reduce investor confusion about end of day securities prices.
  • The CTA is also implementing a mechanism to clearly identify after-hours trades on the consolidated tape. The CTA participants will add a "T" modifier to after-hours trade reports in a uniform manner. The Nasdaq tape already uses the "T" modifier to identify after-hours trades. Vendors and the media can use the "T" modifiers to segregate after-hours transactions from end of day stock price summaries that are designed to reflect regular session trading activities.

SEC Press Release (October 4, 2000)

 
 



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.

Germany Announces New Tax Reclaim Procedure for U.S. Mutual Funds

October 9, 2000 9:56 AM
The German Federal Finance Office ("FFO") announced a new tax reclaim procedure on August 23, 2000 for U.S. mutual funds which are treated as a regulated investment company (a "RIC") under the U.S.-German Income Tax Treaty (the "Treaty"). Under the new procedure, RICs are not entitled to claim a tax refund for themselves. Instead, RICs can only seek a tax refund on behalf of their shareholders, making the process of obtaining the refund more difficult and likely reducing the amount of the refund. A tax reclaim represents a receivable owed to the RIC by the German tax authorities in an amount equal to the difference between the German withholding tax rate on dividends of 25% and the lower withholding rate of 15% the RIC is entitled to under the Treaty.

The FFO noted that according to Article 10(2) of the Treaty, which took effect on August 21, 1991, the person to which the income is attributable for tax purposes under the laws of the state of the source of the income or gains is entitled to relief from taxation at the source. The FFO stated that a mutual fund which operates as a RIC serves only as a conduit for income and gains which are passed through to its shareholders. Accordingly, the persons who would be entitled to relief from taxation at the source would be shareholders of the RIC, not the RIC itself. The FFO commented that RICs are eligible to file tax reclaims under the Treaty solely on behalf of their U.S. shareholders by submitting a questionnaire whereby the RIC certifies, to the best of its knowledge, the percentage of the RIC's shareholders that are U.S. residents at the end of the RIC's fiscal year. The FFO would then use the percentage of U.S. shareholders provided by the RIC to determine the refundable tax reclaim amount. For example, if the RIC certified that it had 90% U.S. shareholders, the RIC would receive a refund of 90% of outstanding tax reclaims from Germany. The FFO added that it reserves the right to audit information provided by the RIC on a random basis. The FFO noted that in the exceptional case of a RIC having itself been subject to tax because it did not sufficiently distribute its earnings, the RIC would be entitled to Treaty benefits and a tax refund at the entity level.

The Investment Company Institute (the "ICI"), commenting on the FFO's announcement, stated that it strongly disagreed with the position of the FFO that RICs are not entitled to claim benefits under the Treaty at the entity level. The ICI further stated that it has retained German counsel to address this issue with the German tax authorities on behalf of the U.S. mutual fund industry.
 
 



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 CFTC Reach Agreement on Single Stock Futures

October 2, 2000 11:56 AM
The SEC and CFTC reached agreement on how to regulate the trading of single stock futures and have forwarded a letter to Congress urging the passage of the Commodity Futures Modernization Bill (the "Bill") which addresses the legal and regulatory framework for the over-the-counter derivatives markets. The Bill also includes regulatory relief for exchange-traded futures and the repeal of the prohibition on trading single stock futures.

The agreement between the SEC and CFTC contemplates their joint regulation of the market for single stock futures and narrow-based indexed futures which could be traded through both broker-dealers and futures commission merchants. Under the agreement, security futures are defined as securities while narrow-based stock index futures will be defined by an objective test. The CFTC will retain jurisdiction over security futures, but that jurisdiction will not be exclusive. Markets and intermediaries that trade securities futures would be required to register with both agencies, but an expedited notice registration with the SEC would be permitted for futures markets and intermediaries whose sole securities business is in security futures. A notice registration would also be available for securities exchanges and broker-dealers whose only futures business is in security futures. The Commodity Exchange Act would be amended to eliminate duplicative regulation. The agencies agreed to defer the trading on security futures for one year after enactment of the legislation and trading options on these futures for four years after enactment (if the agencies permit this option trading in the future).

The agreement further provides for linked and coordinated clearing to encourage listing of the same security futures on multiple markets. The linkage would be required after two years from enactment of the legislation or when a substantial market exists for the products as determined by an objective test. Margin levels, listing standards and other key trading practices would be jointly supervised by the agencies under the agreement. Margin levels for security futures products would not be lower than comparable option margin levels. The National Futures Association would be responsible for ensuring compliance with the securities laws as they apply to futures commission merchants registered with the SEC under the notice registration process.

The Bill calls for equivalent tax treatment for equity options and security futures products. The determination of tax equivalency will be made by the Secretary of the Treasury. In their joint letter to the leadership of the House and Senate, the SEC Chairman, CFTC Chairman, Federal Reserve Board Chairman and Treasury Secretary emphasized the need for Congress to move expeditiously on the Bill to modernize OTC derivatives regulation. The letter stressed that innovation may be stifled and the financial markets hampered in their ability to compete globally if OTC derivatives regulations are not modernized. SEC Today, Volume 2000-182 (September 21, 2000).

 
 



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.

Permits Fund to Exclude Shareholder Proposal to Approve New Investment Advisory Contract

October 2, 2000 10:50 AM

The SEC staff permitted a closed-end investment company (the "Fund") to omit from its proxy materials a proposal and supporting statement submitted by a shareholder, a registered investment adviser. That proposal stated that if the existing investment advisory contract is terminated, the Fund would enter into a new investment advisory contract with the shareholder. The shareholder argued, in its supporting statement, that the Fund and its investment adviser had not taken sufficient action to reduce the discount from net asset value at which Fund shares had been trading. At a meeting of the board of directors of the Fund held July 18, 2000, the directors voted to approve a new investment advisory agreement between the Fund and its existing investment adviser and to call a special meeting of shareholders to consider the new agreement, as well as various governance matters. The shareholder submitted its proposal and supporting statement to the Fund for inclusion in the Fund's proxy materials about four days after the Fund filed preliminary proxy materials with the SEC.

The Fund asserted in its no-action request that it was permitted by Rule 14a-8 under the Securities Exchange Act of 1934 to exclude the proposal from its proxy materials for three reasons:

  • First, Rule 14a-8(i)(4) provides that a company may exclude a shareholder proposal from the company's proxy statement if the proposal is designed to benefit the shareholder, or to further a personal interest to the proposing shareholder which is not shared by the company's other shareholders. The Fund argued that the shareholder proposal would result in the shareholder receiving management fees from serving as the adviser, which is a benefit not shared by the Fund's other shareholders.
  • Second, the Fund argued that Rule 14a-8(i)(9), which permits a company to exclude a proposal that directly conflicts with the company's own proposal, would permit the Fund to exclude the shareholder proposal because the Fund already had included a proposal to approve a new investment advisory agreement between the Fund and its existing adviser.
  • Third, the Fund noted that Rule 14a-8(e) requires that, in order to be considered for inclusion in a company's proxy materials, a shareholder proposal must be received a reasonable time before the company begins to print and mail its proxy materials. The Fund noted that it received the proposal after it had already filed its preliminary proxy materials and after it already received comments from the staff of the SEC. The Fund cited several no-action letters in which the staff did not object to the exclusion of shareholder proposals submitted after the company had filed preliminary proxy materials with the SEC.

In its response to the Fund, the staff noted that there appears to be some basis for the Fund's view that the proposal and supporting statement may be omitted from the Fund's proxy materials under Rule 14a-8(i)(4). The staff accepted the Fund's argument that if the proposal were adopted, the proponent would receive management fees from serving as adviser, which would be a benefit not shared by the Fund's other shareholders. The staff concluded that under these circumstances it would not recommend any enforcement action to the SEC if the Fund omitted the shareholder's proposal from its proxy materials. The staff noted that in reaching its conclusion, it did not find it necessary to consider the Fund's other bases for seeking to omit the proposal. Mentor Income Fund, Inc., SEC No-Action Letter (September 7, 2000).

 
 



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

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

Staff Issues Legal Bulletin Clarifying the Applicability of the Investment Advisers Act to Financial Advisers of Municipal Securities Issuers

October 2, 2000 10:39 AM

The staff of the Division of Investment Management (the "Division") of the Securities and Exchange Commission ("SEC") has issued a legal bulletin stating its views on the applicability of the Investment Advisers Act of 1940 (the "Advisers Act") to financial advisers of municipal securities issuers. The bulletin clarifies the circumstances under which financial advisers (1) may be investment advisers, and (2) may give advice to issuers of municipal securities regarding the investment of offering proceeds without being deemed to be investment advisers.

Financial advisers to issuers of municipal securities typically provide a range of services concerning the structuring, timing and issuance of bonds. When providing these services, financial advisers may also provide advice concerning the investment of the proceeds of the bond offerings. The staff stated that under certain circumstances, financial advisers that provide this advice will be investment advisers subject to the Advisers Act. The staff noted that two recent enforcement actions against financial advisers for advising municipal clients on how to invest their bond offering proceeds without registering as an investment adviser have created substantial concern among financial advisers to municipal issuers about their status under the Advisers Act. The staff stated that whether a person is an investment adviser depends on whether the person:

  • provides advice, or issues reports or analyses, regarding securities or as to the advisability of investing in,
  • purchasing, or selling securities;
  • provides these services for compensation; and
  • is in the business of providing these services.

The staff commented that the Division construes the three elements of the investment adviser definition broadly. The staff noted that while financial advisers would technically satisfy all three elements of the definition of investment adviser, the Division does not believe that Congress generally intended to apply the Advisers Act to any person who merely advises issuers concerning the structuring of their finances. Accordingly, the staff stated that the Division would not consider a financial adviser to be an investment adviser if it limits its activities to providing advice as to whether and how a municipality should issue debt securities, including advice about the structuring, timing and terms of any issuance.

The staff noted that some financial advisers may also provide specific investment advice to clients regarding the investment of the proceeds of their municipal bond offerings and non-government securities. The staff stated that whether these financial advisers would fall within the definition of investment adviser would depend on whether the financial advisers were "in the business" of providing investment advice (since the staff presumes that the first two elements of the definition would be satisfied). The staff stated that the Division views a person generally as being "in the business" of providing investment advice if it:

  • holds itself out as an investment adviser or as one who provides investment advice;
  • receives any separate or additional compensation that represents a clearly definable charge for providing advice about securities, regardless of whether the compensation is separate from or included within any overall compensation, or receives transaction-based compensation if the client implements the advice; or
  • on anything other than rare, isolated and non-periodic instances, provides specific advice, including a recommendation or analysis about specific securities or specific categories of securities.

The staff commented that a financial adviser that provides specific advice about the investment of temporarily idle bond proceeds routinely or with some regularity is "in the business" of providing investment advice. The staff further emphasized that the financial adviser must provide this advice on "rare, isolated and non-periodic instances," in order not to be deemed to be in the business of providing investment advice, provided that it receives no separate, additional or transaction-based compensation for performing these services and does not hold itself out as an investment adviser. The staff added that the determination as to whether a financial adviser's occasional advice about investing bond proceeds is only incidental to the financial adviser's business depends on all of the facts and circumstances. The staff commented that a financial adviser should consider the number of times that it has provided this advice during the past twelve months. If the financial adviser has provided investment advice several times during this period it would likely to be deemed to be an investment adviser, whether the advice was provided to a single client multiple times or to several clients one time each.

The staff then noted that the Division has taken a slightly different position about the applicability of the Advisers Act to financial advisers who give incidental advice about money market funds to financial advisory clients. The staff noted that money market funds are highly regulated by the SEC and are very liquid and safe investments. Given the nature of money market funds and the purposes for which they are used, the Division believes that a financial adviser that is providing financial advisory services to a client may also advise that client about investments in specific money market funds without being "in the business" of providing investment advice if:

  • the advice about the money market funds is solely incidental to the financial advisory services that the financial adviser provides to its financial advisory clients;
  • the financial adviser receives no separate, additional or transaction-based compensation for the advice about the money market funds;
  • the financial adviser does not hold itself out as an investment adviser; and
  • the financial adviser does not have discretionary authority over the assets of its financial advisory clients that are invested in the money market funds.

Division of Investment Management of the Securities and Exchange Commission, Staff Legal Bulletin No. 11 (September 19, 2000)

 
 



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.