SEC POSTS RELEASE REQUIRING HEDGE FUND ADVISERS TO REGISTER
12.2.2004 The SEC posted the release adopting Rule 206(4)-2, which will require investment advisers to hedge funds to register with the SEC by February 1, 2006 under certain circumstances.
Rule 203(b)(3)-2 requires investment advisers to count each owner of a “private fund” towards the threshold of 14 clients for purposes of determining the availability of the private adviser exemption of section 203(b)(3) of the Act.184 As a result, an adviser to a “private fund,” which is defined in rule 203(b)(3)-1 and discussed below, can no longer rely on the private adviser exemption if the adviser, during the course of the preceding twelve months, has advised private funds that had more than fourteen investors.
Please click http://www.sec.gov/rules/final/ia-2333.pdf for a copy of the release adopting the rule.
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SEC SETTLES FRAUD CHARGES AGAINST AN ADVISER
11.23.2004 The SEC settled fraud
charges against First Access Financial, LLC, First Access, Inc., Thomas
H. Keesee and Eduardo Lautieri. The SEC had charged the
defendants with securities fraud in connection with an unregistered
interstate offering and sale of securities in the form of interests in a
pooled foreign currency trading account.
On January 28, 2004, the SEC filed a complaint against the
defendants in the United States District Court, alleging that defendants, using aggressive cold
calling, an Internet website, television infomercials and paid radio
spots, claimed to provide investors access to foreign exchange markets
at the special "Interbank level" supposedly accessible only to the "most
profitable" and "largest financial institutions in the world." The
Complaint also alleged that the defendants further claimed to have a
"Currency Management Team" with a five-year track record of 100%
returns, headed by "a world-renowned institutional money manager" who is
a "Top 10 certified and rated trader." The Commission contended these
claims, as well as others that defendants made, were false and that
First Access Financial was, in fact, merely a five-month-old boiler room
outfit. Defendants raised $243,000 from investors in at least seven
states and two foreign countries, with no investor funds going to
“Interbank level” foreign currency trading.
Please click http://www.sec.gov/litigation/litreleases/lr18984.htm for the administrative order.
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MARKET TIMING CHARGES AGAINST PILGRIM BAXTER FOUNDERS SETTLED
11.17.2004 The SEC issued an order instituting
settled administrative and cease-and-desist proceedings against Gary L.
Pilgrim and Harold Baxter, founders of Pilgrim Baxter & Associates, Ltd. (PBA), which managed the PBHG Funds. The Order also requires Pilgrim to comply with certain undertakings, and
directs him to pay $60 million in disgorgement and $20 million in civil
money penalties. Another order entered against Mr. Baxter requires him to comply with certain undertakings, and
directs him to pay $60 million in disgorgement and $20 million in civil
money penalties.
In the Orders, the SEC finds that from, at least, June 1998
through December 2001, PBA, under the leadership of Baxter and PBA co-
founder, Pilgrim, permitted several investors,
including investors associated with personal friends of Baxter and
Pilgrim, to trade rapidly in and out of certain PBHG Funds, reaping
profits and impacting the value of the funds to the detriment of long-
term investors. The SEC further found that, at Baxter’s
direction, PBA provided non-public, 30-day stale portfolio holdings
information pertaining to certain PBHG funds to Baxter’s friend, the
President of a New York brokerage firm. Baxter’s friend, in turn,
provided the nonpublic information to customers of the New York Broker
to use to facilitate market timing of certain PBHG funds and to exercise
hedging strategies through other financial and brokerage institutions.
Please click http://www.sec.gov/litigation/admin/33-8505.htm for the administrative order against Mr. Pilgrim.
Please click http://www.sec.gov/litigation/admin/33-8506.htm for the administrative order against Mr. Baxter.
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HEDGE FUND ADVISER CHARGED WITH USING MISLEADING VALUATION METHODOLOGY
11.4.2004 The SEC in an administrative proceeding alleged that John D. Barry, Thomas P. Daniels, John M. Irwin, and Mark P.
Miszkiewicz made material
misrepresentations to investors from at least the beginning of 2002
through October 2002 about the valuation methodology Beacon Hill used
for calculating net asset vhttp://www.sec.gov/litigation/litreleases/lr17831.htmalues; about the hedging and trading strategy
for its purportedly “market neutral” hedge funds; and about the value
and performance of these funds.
Please click http://www.sec.gov/litigation/litreleases/lr17831.htm to access the litigation release.
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SEC SETTLES WITH FREMONT INVESTMENT ADVISORS
11.4.2004 The SEC settled administrative proceedings
against San Francisco-based mutual fund adviser Fremont Investment
Advisors, Inc. (Fremont) and former President and CEO Nancy Tengler. found Fremont entered into improper and
undisclosed agreements allowing favored large investors to engage in
rapid in-and-out securities trading known as market timing and charged
Tengler and Adams for their role in Fremont’s misconduct. In addition
to the market timing charges, the SEC charged Fremont for
allowing mutual fund trades to be placed after the 4:00 p.m. market
close. Without admitting or denying the SEC’s findings, Fremont
has agreed to pay $4.146 million, including disgorgement of $2.146
million and a civil penalty of $2 million, to settle the Commission’s
charges. The Commission anticipates distributing the recovered money to
investors of the mutual funds affected by the market timing.
Fremont’s mutual fund prospectus
prohibited market timing, and the firm enforced this policy by employing
a “timing cop” to monitor and block excessive trading. Notwithstanding
this policy, Fremont entered into undisclosed agreements in 2001 and
2002 allowing certain large investors to engage in market timing in
Fremont’s Global and U.S. Micro-Cap Funds. The SEC’s order found
that one of these agreements included a requirement that the investor
place a multimillion-dollar long-term investment (or “sticky asset”) in
another Fremont fund, one recently established and co-managed by then-
CEO Nancy Tengler. The Commission alleges that Sales VP Adams crafted
the agreement, and finds that Tengler allowed the arrangement to go
forward. The improper market timing arrangements generated additional
fees of at least $170,000 for Fremont between 2001 and 2002, while
allowing significant growth in the size of the fund founded by Tengler.
Please click http://www.sec.gov/litigation/admin/ia-2317.htm to access a copy of the administrative order.
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SEC ISSUES CONCEPT RELEASE TO OVERHAUL DISCLOSURE RULES UNDER THE 1933 ACT
11.3.2004 The SEC proposes rules that will modify and advance significantly the registration, communications, and offering processes under the Securities Act of 1933. The proposals, if adopted, would eliminate unnecessary and outmoded restrictions on offerings. In addition, the proposals would provide more timely investment information to investors without mandating delays in the offering process that the SEC believes would be inconsistent with the needs of issuers for timely access to capital. The proposals also would continue the SEC's long-term efforts toward integrating disclosure and processes under the Securities Act and the Securities Exchange Act of 1934. The proposals would accomplish these goals by addressing communications related to registered securities offerings, delivery of information to investors, and procedural restrictions in the offering and capital formation processes.
Please click http://www.sec.gov/rules/proposed/33-8501.htm for a copy of the proposing release.
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REGULATION B IMPLEMENTATION POSTPONED
11.1.2004 The SEC extended
until March 31, 2005, the compliance dates for banks with respect to
certain broker registration requirements contained in the Gramm-Leach-
Bliley Act (GLBA). The SEC does not expect banks to develop
compliance systems to meet the terms of the “broker” exceptions until
the Commission amends its rules. Banks have indicated that they will
need time to implement systems to ensure compliance with the new
statutory requirements regarding the definition of “broker.”
The GLBA repealed a full exception that had allowed banks to engage in
securities activities without registering as a broker or dealer and
replaced the full exception with new functional exceptions. The new
functional exceptions were to become effective May 12, 2001. On May 11,
2001, the Commission adopted interim rules (Interim Rules) that, among
other things, gave banks time to come into full compliance with the more
narrowly tailored exceptions from broker-dealer registration. To further
accommodate the banking industry's continuing compliance concerns, the
SEC delayed the effective date of the bank “broker” rules through
a series of orders that ultimately extended the temporary exemption from
the definition of “broker” to Nov. 12, 2004.
The SEC extended the exemption from the definition of
“broker” until March 31, 2005, pending its consideration of comments
received on the Regulation B proposal. This will give the Commission
time to fully consider comments received on Regulation B and to take any
final action on the proposal as necessary, including consideration of
any modification necessary to the proposed compliance date.
Please click http://www.sec.gov/news/press/2004-151.htm for a copy of the press release announcing the postponement.
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