INTERPRETIVE GUIDANCE ON SOFT DOLLARS ISSUED
12.27.2001 The SEC issued a release that provides interpretive guidance on the application of Section 28(e) of the Securities Exchange Act of 1934. Section 28(e) provides a safe harbor to money managers who use the commission dollars of their advised accounts to obtain research and brokerage services. The guidance clarifies that the term "commission" for purposes of the Section 28(e) safe harbor encompasses, among other things, certain transaction costs, even if not denominated a "commission."
If money managers use commission dollars of their advised accounts to obtain research and brokerage services, Section 28(e) prevents them from being held to have breached a fiduciary duty, provided the conditions of the section are met.1 Previously, the Commission interpreted Section 28(e) to be available only for research and brokerage services obtained in relation to commissions paid to a broker-dealer acting in an "agency" capacity.
Currently, NASD rules require a riskless principal transaction in which both legs are executed at the same price to be reported once, in the same manner as an agency transaction, exclusive of any markup, markdown, commission equivalent, or other fee. Coupled with Exchange Act Rule 10b-10, this form of trade reporting means that a money manager agreeing to an eligible riskless principal transaction receives the same price as received in the offsetting trade and that this price is disclosed on a confirmation that also fully discloses the remuneration to the NASD member for effecting this transaction. Thus, a money manager opting for an eligible riskless Principal Transaction would now be informed of the entire amount of a market maker's charge for effecting the trade.
In recognition of the transparency achieved in the Nasdaq market for certain riskless principal transactions, which allows a money manager to make the necessary determination under Section 28(e), the SEC modified its interpretation of Section 28(e). The SEC now interprets the term "commission" in Section 28(e) to include a markup, markdown, commission equivalent or other fee paid by a managed account to a dealer for executing a transaction where the fee and transaction price are fully and separately disclosed on the confirmation and the transaction is reported under conditions that provide independent and objective verification of the transaction price subject to self-regulatory organization oversight.
Please click http://www.sec.gov/rules/interp/34-45194.htm to access the administrative action.
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SEC BRINGS TRADE ALLOCATION CASE AGAINST COLORADO ADVISER
12.21.2001 The SEC instituted an administrative and cease-and-desist proceedings against Zion Capital Management LLC (Zion) and Zion's president. The SEC alleges that, in 1998, Zion, a registered investment adviser, allocated more profitable trades to an entity in which the President had a financial interest and more unprofitable trades to Zion's sole advisory client. As a result, during a nine-month period, Zion's client lost more than sixty percent of its investment while the entity in which the President had an interest made a substantial profit. The SEC also alleges that Zion and its President misrepresented their trading strategy and methods for resolving conflicts of interest to investors in offering materials and in the Form ADV Zion filed with the SEC. Further, the SEC alleges that Zion, aided and abetted by the President, failed to keep adequate records concerning, among other things, Zion's instructions for the allocation of trades.
Please click http://www.sec.gov/litigation/admin/33-8046.htm to access the administrative action.
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ADVISER CHARGED WITH MISAPPRORPIATING CLIENT ASSETS
12.19.2001 The SEC obtained a preliminary injunction against Hoover Capital Management (Hoover) and affiliated entities and persons. The SEC claimes that between at least May 2000 and September 18, 2001, Hoover and certain affiliated entities withdrew more than $470,000 out of a domestic hedge fund, and improperly used these funds for personal and business expenses.
The order prohibits Hoover and affiliated advisers and personnel from engaging in the fraudelent offering and sale of securities. The order also freezes their assets.
Please click http://www.sec.gov/litigation/litreleases/lr17284.htm to access the administrative action.
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MARKET TIMER CHARGED WITH FRAUDELENT PERFORMACE ADVERTISING
12.14.2001 The SEC charged Market Timing Systems, Inc. (MTSI), with engaging in fraudelent advertising. The SEC alleges that MITSI's advertisements were fraudlent because the advertisements:
- falsely advertising its performance;
- failing to maintain docucment its advertised performance;
- failing to maintain required financial books and records; and
- failing to disclose the disciplinary hearing of its chief executive officer.
MITSI is an investment adviser located in California.
Please click http://www.sec.gov/litigation/admin/ia-2002.htm to access a copy of the administrative action.
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TENNESSEE ADVISER CHARGED WITH MAKING FALSE AND MISLEADING ADS
12.12.2001 The SEC accepted settlement orders that found that Cambridge Equity Advisers, Inc. ("Cambridege), and its President violated the antifraud provisions of the Investment Advisers Act of 1940 by distributing advertisements that:
- stated that Cambridge managed over $300 million when it actually managed
approximately $100 million;
- overstated the amount to which an investment would have grown had it been invested in Cambridge's Capital
Appreciation Accounts portfolio;
- failed to disclose that several of
Cambridge's model portfolios were designed with the benefit of hindsight
and retroactively applied;
- compared the performance of one of
Cambridge's Capital Appreciation Accounts portfolio to the S&P 500 Index
without disclosing that Cambridge's portfolio did not perform as well as
that index for several years between 1990 and 1997; and
- made
references to specific recommendations that Cambridge had made in the
past.
Cambridge is located in Brentwood, Tennessee. The SEC censured Cambridge and its President, and ordered them to pay civil penalities of $40,000 and $20,000, respectively, plus post-judgment interest.
The SEC order also requires Cambridge to:
- retain an independent consultant to review (i) Cambridge's advertisements for a period of two
years, and (ii) Cambridge's policies and procedures regarding its
advertisements, whose recommendations Cambridge will adopt, and
- send a copy of the SEC's order to clients and, for a period of one
year from the date of the order, to prospective clients.
Please click http://www.sec.gov/litigation/admin/ia-2001.htm for a copy of the administrative action.
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AIMR PROPOSES BEST EXECUTION GUIDELINES
12.11.2001 The Association for Investment Management and Research (AIMR) proposed best execution guidelines for investment advisers. The guidelines -- called Trade Management Guidelines -- set forth the obligations investment advisers have to clients regarding the execution of client trades and trade management. The guidelines also cover conflicts of interest, disclosure obligations, and the obligations to consider order-routing options.
Please click http://www.aimr.org/pdf/standards/proposed_tmg.pdf to access a copy of the guidelines.
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INJUNCTION ENTERED AGAINST HEDGE FUND ADVISER FOR COMMITTING FRAUD
12.10.2001 The SEC obtained a preliminary injunction that prohibits Peter Chabot, two affiliated advisers and a hedge fund from enging in the fraudelent offering and sale of securities. The order also freezes their assets.
The SEC alleges that Chabot and the entities made material misrepresentations and omissions to approximately 14 investors regarding the hedge fund. The investors invested over $1.2 million with Mr. Chabot. The SEC alleges that Mr. Chabot used the funds raised for personal expeneses, instead of investing them in securities.
Please click http://www.sec.gov/litigation/litreleases/lr17276.htm to access the administrative action.
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REPORT ON REGULATION FD ISSUED
12.6.2001 The SEC issued Special Study: Regulation Fair Disclosure Revisited. The report makes a number of recommendations on the rule that governs the release of corporate information, including that the SEC should consider issuing an interpretative release to clarify its position on the meaning of "materiality."
The report was prepared by Commissioner Laura Unger, who is leaving the SEC at the end of the year. Commissioner Unger voted against Regulation FD when it was adopted.
Please click http://www.sec.gov/news/studies/regfdstudy.htm to access a copy of the report.
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DIRECTOR ROYE SPEAKS ON MUTUAL FUND ISSUES
12.6.2001 Paul Roye, the Director of the SEC's Division of Investment Management, spoke on a variety of issues related to the mutual fund industry at the ICI 2001 Securities Law Developments Conference. Topics covered included:
- amendments to Regulation 17a-8, which would permit more types of affiliated mutual fund mergers;
- amendments to Rule 17f-4, which governs fund portfolio securities deposited at securities depositories;
- exchanged traded funds;
- the blurring of the line between broker-dealers and investment advisers;
- the goal of the SEC to improve its "services" to the industry; and
- real-time enforcement of the securities laws and rules.
Please click http://www.sec.gov/news/speech/spch528.htm to access a copy of the speech.
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ENFORCEMENT DIRECTOR SPEAKS ON LEGG MASON FAILURE TO SUPERVISE CASE
12.6.2001 Stephen Cutler, the Director of the SEC's Division of Enforcement, spoke on a recent enforcement action against Legg Mason where the SEC brought a failure-to-supervise action against an adviser for a violation by a portfolio manager employed by a sub-adviser. In this case, the adviser and sub-adviser were related entities. However, Mr. Walker stated that a failure-to-superviser charge against an adviser that enters into a sub-advisory relationship with an unaffilated entity.
Mr. Walker offered several suggestion on how an adviser can supervise a sub-adviser, including:
- Obtain at least annually a certificate from the sub-adviser that it has complied with procedures designed to prevent violations of the securitie laws;
- amendments to Rule 17f-4, which governs securities deposited at securities depositories;
- conduct periodic meetings with sub-adviser personnel;
- require the sub-adviser to notify the adviser when it is being inspected by the SEC and turn over copies of inspection reports; and
- periodically re-evaluate sub-adviser procedures, especially when there are significant changes at the sub-adviser.
Please click http://www.sec.gov/news/speech/spch527.htm to access a copy of the speech.
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SEC ISSUES Q&A ON NEW FUND NAME RULE
12.4.2001 The SEC issued an Q&A release about Rule 35d-1 under the Investment Company Act of 1940, which will provide guidance about the SEC's new "names" rule. The SEC gives examples when the names rules will not apply (e.g., a fund with the name "Global" in it), and names where the rule would apply (e.g., a fund with the name "Large-Capitalization" in it).
Please click http://www.sec.gov/divisions/investment/guidance/rule35d-1faq.htm to access a copy of the Q&A.
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ILLINOIS ADVISER BARRED FROM INDUSTRY
12.3.2001 The SEC barred Felix Anthony Berry from association with any investment adviser. The SEC took the action in light of U.S. v. Berry, No. 00-CR-444, where Berry pled guilty to one count of violating 18 U.S.C. § 1341 (mail fraud) and was sentenced to 18 months in prison and ordered to make restitution of $856,000 to investors. The criminal conviction was based upon Berry's misappropriation of approximately $856,000 in client funds that had been entrusted to him for investments.
Please click http://www.sec.gov/litigation/admin/ia-2000.htm to access the administrative action.
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