SEC TO ADOPT COMPLIANCE RULE AT DECEMBER 3rd MEETING
11.26.2003 The SEC will hold an open meeting on Wednesday, December 3rd to:
- consider whether to adopt new rule 38a-1 under
the Investment Company Act, new rule 206(4)-7 under the Investment
Advisers Act, and amendments to rule 204-2 under the Advisers Act.
These rules and rule amendments would require each investment
company and each investment adviser registered with the
SEC to adopt and implement compliance policies and
procedures, to review those policies and procedures periodically
for their adequacy and the effectiveness of their implementation,
and to designate a chief compliance officer who, in the case of
funds, would report directly to the board;
- consider whether to propose amendments to
rule 22c-1 under the Investment Company Act of 1940 designed to
eliminate late trading of redeemable securities issued by a
registered investment company. The proposed amendments
would require that an order to purchase or redeem fund shares be
received by the fund, its primary transfer agent, or a registered
securities clearing agency, by the time that the fund establishes
for calculating its net asset value in order to receive that day's
price; and
- consider whether to propose amendments that would (1) require
open-end management investment companies and variable insurance
products to disclose in their prospectuses information about the
risks of, and policies and procedures with respect to, the frequent
purchase and redemption of investment company shares; (2) clarify
that open-end management investment companies and insurance company
managed separate accounts that offer variable annuities are
required to explain both the circumstances under which they will
use fair value pricing and the effects of using fair value pricing;
and (3) require open end management investment companies and
insurance company managed separate accounts that offer variable
annuities to disclose their policies with respect to disclosure of
portfolio holdings information.
Please click http://www.sec.gov/news/digest/dig112603.txt for a copy of the press release announcing the open meeting.
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SECURITY TRUST COMPANY FORCED TO SHUT DOWN
11.25.2003 The Office of the Comptroller of the Currency, the SEC and the New York Attorney General jointly
announced a series of actions against Phoenix, Arizona-based Security
Trust Company, N.A. (STC) and three former executives, arising from
their participation in mutual fund late trading and market timing
schemes.
The NYAG announced criminal actions against STC's former chief executive
officer, Grant D. Seeger; its former president, William A. Kenyon; and
its former senior vice president for corporate services, Nicole
McDermott.
The SEC announced the filing of civil fraud charges against STC, Seeger,
Kenyon, and McDermott. The charges primarily related to late trading and market timing:
Late Trading: "Late trading" refers to the practice of placing orders
to buy or sell mutual fund shares after market close at 4:00 p.m. EST,
but at the mutual fund's net asset value (NAV), or price, determined at
the market close. Late trading enables the trader to profit from market
events that occur after 4:00 p.m. EST but that are not reflected in that
day's price. From May 2000 to July 2003, STC facilitated hundreds of
mutual fund trades in nearly 400 different mutual funds by several hedge
funds controlled by Edward J. Stern, known as the Canary Capital funds.
Approximately 99% of these trades were transmitted to STC after the 4:00
p.m. EST market close; 82% of the trades were sent to STC between 6:00
p.m. and 9:00 p.m. EST. The hedge funds' late trading was effected by
STC through its electronic trading platform, which was designed
primarily for processing trades by TPAs for retirement plans. At the
direction of Seeger and McDermott, STC repeatedly misrepresented to
mutual funds that the hedge funds were a retirement plan account, even
though STC, Seeger, Kenyon, and McDermott knew that the hedge funds were
not a TPA or a retirement plan account. Mutual funds expected that
retirement plans and their TPAs required several hours after the market
closed to process trades submitted by plan participants before market
close. In contrast, the hedge funds had no such business purpose for
submitting their own trades as late as five hours after market close.
Market Timing: "Market timing" refers to the practice of short term
buying and selling of mutual fund shares in order to exploit
inefficiencies in mutual fund pricing. During its three-year
relationship with the Canary hedge funds, STC and the other defendants
employed various methods to attempt to conceal the hedge funds' market
timing activities from mutual funds, including the following:
- "Shotgun" method -- STC employees opened accounts for the Canary
hedge funds with numerous mutual funds to be traded through STC.
The hedge funds then effected trades through these accounts to
determine which funds would not detect or actively police timing.
- "Omnibus" method -- STC opened five omnibus accounts for the
Canary hedge funds at STC through which the hedge funds' trades
were rotated in an attempt to evade detection by the mutual funds.
- "Taxpayer ID" method -- STC opened mirror accounts for the five
omnibus accounts using STC's taxpayer identification number. This
approach sought to impede efforts by mutual fund companies to
detect market timers by their tax ID numbers.
- "Piggybacking" method -- Devised by Seeger and implemented by
McDermott, this method involved STC setting up a sub-account within
the account of one of STC's TPA clients and attaching the Canary
hedge funds' mutual fund trades to the trades of this client
without its knowledge. The mutual funds that the hedge funds
traded through piggybacking had previously rejected the hedge funds
for market timing, and the hedge funds hoped they could continue to
trade these funds under the name of another STC client.
The OCC announced that STC will begin a process that will result in an
orderly dissolution of the bank by March, 31, 2004.
The Labor Department's Employee Benefits Security Administration, which
enforces provisions of the Employee Retirement Income Security Act that
are designed to protect retirement and employee benefit plans, also
participated in the OCC investigation.
An investigation by the New York Attorney General's office implicated
Security Trust in certain improper and illegal activities, including
late trading and market timing, and triggered an investigation by the
other agencies.
Please click http://www.sec.gov/litigation/litreleases/lr18479.htm for a copy of the administrative action.
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SEC ADOPTS PROXY DISCLOSURE REQUIREMENTS
11.24.2003 The SEC adopted disclosure requirements regarding the operations of board nominating committees and concerning the means, if any, by which securityholders may communicate with directors.
The SEC expects that the disclosure will provide security holders with additional, specific information upon which to evaluate the boards of directors and nominating committees of the companies in which they invest.
The new disclosure standards require companies to disclose additional information regarding a company's process of nominating
directors, including:
- whether a company has a separate nominating committee and, if not, the
reasons why it does not and who determines nominees for director;
- whether members of the nominating committee satisfy independence
requirements;
- a company's process for identifying and evaluating candidates to be
nominated as directors;
- whether a company pays any third party a fee to assist in the process or
identifying and evaluating candidates;
- minimum qualifications and standards that a company seeks for director
nominees;
- whether a company considers candidates for director nominees put forward
by shareholders and, if so, its process for considering such candidates; and
- whether a company has rejected candidates put forward by large, long-
term security holders or groups of security holders.
The new disclosure standards also require companies to disclose
information regarding shareholder communications
with directors, including:
- whether a company has a process for communications by shareholders to
directors and, if not, the reasons why it does not;
- the procedures for communications by shareholders with directors;
- whether such communications are screened and, if so, by what process;
and
- the company's policy regarding director attendance at annual meetings
and the number of directors that attended the prior year's annual meeting.
Please click http://www.sec.gov/rules/final/33-8340.htm for a copy of the adopting release.
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CALIFORNIA ADVISER CHARGED WITH VIOLATING CUSTODY RULES
11.21.2003 The SEC brought charges against Kaufman, Bernstein, Oberman, Tivoli & Miller, LLC (Kaufman)
and Howard M. Bernstein (Bernstein). Kaufman is a registered investment adviser
based in Los Angeles, California that acts as the business manager for clients who are
employed in the entertainment industry.
The firm was charged with violating Section 206(4) of the Advisers Act and Rule 206(4)-2(a) thereunder. Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder make it a fraudulent act
for any registered investment adviser who has custody of client funds or securities to take
any action with respect to such funds or securities unless, among other things, an
independent public accountant conducts an examination of those funds and securities
without prior notice during each calendar year.
Kaufman and Bernstein violated the custody provisions by taking action with respect to
client funds and securities in light of the following deficiencies. First, Kaufman's
accountant failed to conduct the annual examinations in nine of the ten examinations
between 1991 and 2001. In addition, from 1998 through 2001, Kaufman's accountant did
not conduct the examinations without prior notice.
Please click http://www.sec.gov/litigation/admin/ia-2194.htm to access a copy of the release announcing the administrative action.
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NASD MAY REQUIRE MUTUAL FUNDS TO DISCLOSE EXPENSES IN ADVERTISEMENTS
11.21.2003 The NASD has proposed a rule that would require disclosure of mutual fund expenses in advertisements and other sales material that promotes the fund's performance. The proposal would require that all fund advertisements, sales material, and correspondence that includes performance information include a prominent text box that sets forth the fund's:
- Standardized performance information (i.e., 1, 5 and 10-year returns);
- Maximum sales charge; and
- Annual expense ratio.
Please click http://www.nasdr.com/news/pr2003/release_03_052.html for a copy of the release proposing the rule.
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FOUNDERS OF PBHG FUNDS AND PILGRIM BAXTER & ASSOCIATES CHARGED WITH MARKET TIMING ABUSES
11.20.2003 The SEC filed a civil injunctive
action in the United States District Court for the Eastern District of
Pennsylvania against Gary L. Pilgrim, of Malvern, PA, Harold J. Baxter,
of Berwyn, PA and Pilgrim Baxter & Associates, Ltd. (Pilgrim Baxter), a
registered investment adviser headquartered in Wayne, PA, charging them
with fraud and breach of fiduciary duty in connection with market timing
of the PBHG Funds. Pilgrim was the President, Chief Investment Office
and Director of Pilgrim Baxter & Associates, and the President of the
PBHG Funds. Baxter was the CEO and Chairman of Pilgrim Baxter &
Associates, and the Chairman and trustee of the PBHG Funds and the PBHG
Insurance Series Fund.
The SEC's complaint alleges that Pilgrim had a substantial
interest in a hedge fund, Appalachian Trails, whose trading strategy
involved rapid trading of mutual fund shares. In March 2000, with the
approval of both Pilgrim and Baxter, Appalachian began market timing
several PBHG funds including the PBHG Growth Fund, whose portfolio was
managed by Pilgrim. Neither Pilgrim nor Baxter disclosed to the Board
of Pilgrim Baxter & Associates, the Board of Trustees of the funds, or
fund shareholders, that Pilgrim had an extensive financial interest in
Appalachian and that Appalachian had been permitted to implement its
trading strategy in PBHG funds.
In addition, the SEC alleges that Baxter provided non-public PBHG
Fund portfolio information to a close friend in the brokerage business,
who was president of Wall Street Discount Corporation, a registered
broker-dealer. The friend then passed this information to Wall Street
Discount customers who used the portfolio information to market time the
PBHG funds and to exercise hedging strategies through other financial
and brokerage institutions.
Please click http://www.sec.gov/rules/proposed/34-48626.htm for a copy of the administrative action.
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HOUSE APPROVES BAKER BILL
11.19.2003 The U.S. House of Representatives yesterday approved H.R. 2420,
the proposed Mutual Funds Integrity and Fee Transparency Act. The bill
would improve transparency relating to the fees and costs that
mutual fund investors incur and to improve corporate governance of
mutual funds. The bill will now move to the Senate, which
is not expected to take it up until 2004.
Please click http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=95973824028+0+0+0&WAISaction=retrieve for a copy of the bill.
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SEC CHAIRMAN OUTLINES PROPOSED MUTUAL FUND REGULATORY REFORMS
11.18.2003 SEC Chairman Donaldson in testimony before the Senate Committee on Banking, Housing and Urban Affairs, outlined possible regulatory reforms to protect mutual fund investors. Donaldson's testimony included a list of Mutual Fund Investors' Rights, including a right to an investment industry that is committed to the highest ethical standards and that places investors' interests first and a right to equal and fair treatment by their mutual funds and brokers.
He testified that the SEC will address late trading and market timing abuses at an open meeting on December 3. Actions likely to be taken that day include proposing a requirement that a mutual fund (or certain designated agents) receive purchase or redemption orders prior to the time the fund prices its shares (typically 4 pm Eastern time); proposing requirements that mutual funds disclose their market timing policies and have specific procedures to comply with their representations; emphasizing the obligation of funds to fair value their securities to avoid stale pricing; adopting rules requiring investment companies and investment advisers to have compliance policies and procedures and a chief compliance officer; and addressing selective disclosure of fund portfolios.
The SEC is also considering other reforms for adoption at a later time. Among the ideas under consideration are a mandatory redemption fee for short-term traders and requiring omnibus account information to be shared between mutual funds and brokers (a step that would also help in addressing problems with investor breakpoint discounts). Donaldson has called upon the NASD to head an Omnibus Account Task Force to study the omnibus account issue and to provide the SEC staff with information and recommendations.
Please click http://www.sec.gov/news/testimony/ts111803whd.htm for a copy of the testimony.
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PUTNAM SETTLES MARKET TIMING CHARGES
11.13.2003 Putnam Investment Management LLC
(Putnam), a registered investment adviser located in Boston,
agreed to the entry of an order in the SEC's administrative
proceeding relating to alleged market-timing trades by certain of
Putnam's employees. In the Order, Putnam has agreed to undertake
significant and far-reaching corporate governance, compliance, and
ethics reforms.
The SEC found that Putnam committed securities
fraud by failing to disclose potentially self-dealing securities trading
by several of its employees. The SEC also found that Putnam
failed to take adequate steps to detect and deter such trading activity
through its own internal controls and its supervision of investment
management professionals.
Putnam agreed to adopt reforms in three areas: (1) restrictions on employee trading; (2)
enhancements of compliance policies, procedures, and staffing, including
relating to employee trading; and (3) corporate governance, including
fund board independence.
Among the reforms Putnam will implement relating specifically to
employee trading is a requirement that employees who invest in Putnam
funds hold those investments for at least 90 days, and in some cases, as
long as one year.
In the compliance area, Putnam will:
- Require Putnam's Chief Compliance Officer to report to the fund
boards' independent trustees all breaches of fiduciary duty and
violations of the federal securities laws;
- Maintain a Code of Ethics Oversight Committee to review
violations of the Code of Ethics and report breaches to the fund
boards of trustees;
- Create an Internal Compliance Controls Committee to review
compliance controls and report to the fund boards of trustees on
compliance matters;
- Retain an Independent Compliance Consultant to review Putnam's
policies and procedures designed to prevent and detect breaches
of fiduciary duty, breaches of the Code of Ethics, and federal
securities law violations by Putnam and its employees; and
- At least once every two years, Putnam will have an independent,
third party conduct a review of the firm's supervisory,
compliance and other policies and procedures in connection with
the firm's duties and activities on behalf of and related to the
Putnam funds.
In the area of corporate governance, Putnam agreed:
- That the fund boards of trustees will have an independent
chairman;
- That the fund boards of trustees will consist of at least 75%
independent members;
- That no board action may be taken without approval by a majority
of the independent directors; and that Putnam will make annual
disclosure to fund shareholders of any action approved by a
majority of the fund board's independent trustees, but not
approved by the full board;
- That the fund boards of trustees will hold elections at least
once every five years, starting in 2004; and
- That the fund boards of trustees will have their own,
independent staff member who will report to and assist the fund
boards in monitoring Putnam's compliance with the federal
securities laws, its fiduciary duties to shareholders, and its
Code of Ethics.
Please click http://www.sec.gov/litigation/admin/ia-2192.htm to access a copy of the release announcing the administrative action.
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TEXAS ADVISER BARRED FROM INDUSTRY
11.5.2003 The SEC accepted the settlement
offers of Kenneth Randall Ward (Ward) and Remmington Advisors, Inc.
(Remmington), an investment adviser registered with the SEC, resulting in revocation of the
investment adviser registration of Remmington, an entity owned and
controlled by Ward. In addition, the Order further orders that Ward
is barred from association with any investment adviser
According to the Order, Ward willfully violated Section 17(a) of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5
thereunder while associated as a register representative with Government
Securities Corporation of Texas, a broker-dealer registered with the
SEC, in connection with the fraudulent offer and sale, and in
connection with the purchase and sale, of inverse floater mortgage
derivative securities to two Texas municipalities.
Please click http://www.sec.gov/litigation/admin/ia-2190.htm to access a copy of the release announcing the administrative action.
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INVESTMENT MANAGEMENT DIRECTOR TESTIFIES BEFORE CONGRESS
11.3.2003 Before the Senate Subcommittee on Financial Management, the Budget and International Security, Committee on Governmental Affairs, SEC Investment Management Director Paul Roye testified about the proposed responses by the SEC to the abuses in the mutual fund industry.
Director Roye testified that the SEC was addressing the practices of intermediaries that sell fund shares. In preparing our rule proposals, the staff is examining the feasibility of requiring that a fund (or certain designated agents) — rather than an intermediary such as a broker-dealer or an unregulated third party — must receive a purchase or redemption order prior to the time the fund prices its shares for an investor to receive that day's price. He also testifed that requiring funds to have procedures to comply with their representations regarding market timing policies and procedures. Thus, if a fund's disclosure documents stated that it discouraged market timing, the fund would be required to have procedures outlining the practices it follows to keep market timers out of the fund.
Please click http://www.sec.gov/news/testimony/ts110303pfr.htm for a copy of the testimony.
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