The Order also found that the supervisor of the employees, failed to:
- review the trading activities engaged in by the employees on behalf of their customers; and
- follow up and investigate these red flags, even though he was aware of
correspondence received from the mutual funds seeking to restrict market
timing trading.
Please click http://www.sec.gov/litigation/admin/34-51588.pdf for a copy of the administrative action.
Back To The Top
OCIE DIRECTOR SPEAKS TO COMPLIANCE PROFESSIONALS
4.20.2005 Lori Richards, the SEC's Director of Office of Compliance Inspections and Examinations spoke at the National Regulatory Services' Twentieth Annual Spring Compliance/Risk Management Conference in Scottsdale, Arizona on issues of interest to compliance professionals.
She spoke extensively about the International Organization of Securities Commissions (IOSCO), an organization comprised of over a hundred securities regulators from around the world, published a discussion paper on compliance called "Compliance Function at Market Intermediaries"(available at http://www.iosco.org/pubdocs/pdf/IOSCOPD198.pdf ). She noted that The paper sets forth some core principles with respect to compliance:
- Each market intermediary should establish and maintain a compliance function. The role of the compliance function is to identify, assess, advise on, monitor and report on a market intermediary's compliance with securities regulatory requirements and the appropriateness of its supervisory procedures.
- The board of directors or senior management is responsible for the firm's compliance, and should establish and maintain the function and assess whether the compliance policies are being observed and are appropriate on an ongoing basis.
- The compliance function should be able to operate on its own initiative, without improper influence from other parts of the business, and should have access to and should report to the board or senior management.
- Staff exercising compliance responsibilities should have the necessary qualifications, experience and professional and personal qualities to enable them to carry out their duties effectively.
- Each market intermediary should periodically assess the effectiveness of its compliance function and should also be subject to review by independent third parties, such as external auditors, self-regulatory organizations or regulators.
- Regulators' supervision of market intermediaries should include the assessment of the compliance function, taking into account the intermediary's size and business.
- Regulators should take steps to encourage market intermediaries to improve their compliance function, particularly when the regulators become aware of deficiencies. In addition, regulators should have the authority to bring enforcement actions, or other appropriate disciplinary proceedings, against market intermediaries relating to their compliance function.
Towards the end of her speech, she stated:
I also believe that firms' internal auditors can and should do more than they may now be doing to review the firm's compliance and internal controls. If I were an internal auditor, I would think that the compliance failures of our recent past would give me a great deal of pause in carrying out a program that did not evaluate the risk of failures or weaknesses in compliance and other internal controls. I hope that internal auditors would also review the firm's compliance program.
Please click http://www.sec.gov/news/speech/spch042005lr.htm for a copy of the speech.
Back To The Top
POWERSHARES FILES REGISTRATION STATEMENT FOR CLOSED-END FUND THAT CAN CONVERT INTO AN ETF
4.18.2005 PowerShares Capital Management filed a registration statement with the SEC for a closed-end fund called PowerShares Zacks Large Cap Ace Fund that can convert into an exchange-traded fund (ETF) if the Fund trades at a discount. If declared effective, this will be the first fund with this feature.
The Fund is based on an index designed by Zacks Investment Research. The Fund's governing documents provide that beginning after 90 days from the date of the initial public
offering, the Fund will automatically convert into an ETF if its Shares close at an average of a 3% or greater discount from the
net asset value of the Fund over any period of 30 consecutive days. No further
approval of the shareholders of the Fund would be necessary. If the Fund
converts to an ETF, its shares will continue to be listed and traded on an exchange to be designated. In addition, the Fund will continuously offer its shares and, at the
option of the holder, redeem its shares at net asset value per share, but only
in large specified numbers of shares called creation units.
Please click http://www.sec.gov/Archives/edgar/data/1316377/000104746905010543/a2151665zn-2a.txt for access to the registration statement.
Back To The Top
ENFORCEMENT DIRECTOR TO LEAVE SEC
4.14.2005 Stephen M. Cutler, Director of the Securities and Exchange Commission’s
Division of Enforcement, announced he intends to leave the
SEC in a month’s time. Mr. Cutler, 43, said he plans to return
to the private sector. He was named Enforcement Director in October
2001.
Mr. Cutler has overseen the agency’s investigations of some of the
largest financial reporting failures in the nation's history, including
those at Enron, WorldCom, Adelphia, Qwest, Tyco and HealthSouth. These
investigations led to enforcement actions against, among others, Kenneth
Lay, Jeffrey Skilling, Andrew Fastow, Scott Sullivan, John Rigas, Joseph
Nacchio, Dennis Kozlowsi and Richard Scrushy.
During Mr. Cutler’s tenure, the Commission also obtained judgments in
enforcement actions totaling more than $6 billion in penalties and
disgorgement, more than $4.5 billion of which is being returned to
harmed investors. Among them were WorldCom’s $750 million penalty (the
largest against a public company in Commission history) and the more
recent $300 million penalty against AOL-Time Warner. Of the 12 largest
penalties in Commission history, ten were obtained in cases brought
under Mr. Cutler’s leadership.
Please click http://www.sec.gov/news/press/2005-56.htm for a copy of the release announcing the resignation.
Back To The Top
SEC ADOPTS RULE CLARIFYING ADVISER EXEMTION FOR BROKER-DEALERS THAT PROVIDE CERTAIN ADVISORY SERVICES
4.12.2005 The SEC adopted new Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 (Advisers Act) that addresses the application of the Advisers Act to broker-dealers offering certain types of brokerage/advisory programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Advisers Act regardless of whether it charges an asset-based or fixed fee (rather than commissions, mark-ups, or mark-downs) for its services. The new rule also provides that broker-dealers are not subject to the Advisers Act solely because they offer full-service brokerage and discount brokerage services, including execution-only brokerage, for reduced commission rates.
The rule addresses the question of when a broker-dealer’s advisory
activities are subject to the Advisers Act because they are not “solely
incidental to” the broker’s business. The rule identifies three
circumstances when a broker-dealer’s advice would not be solely
incidental:
- A broker-dealer that charges a separate fee or
enters into a separate contract for advisory services would have to
treat the client as an advisory client;
- Broker-dealers must
treat their customers who receive financial planning services as
advisory clients; and
- All accounts over
which a broker-dealer has discretionary authority, regardless of how the
broker-dealer is compensated, to be treated as advisory accounts.
The new rule is effective April 15, 2005, except for certain disclosure
requirements, which are effective May 23, 2005.
Please click http://www.sec.gov/rules/final/34-51523.pdf for a copy of the release adopting the rule.
Back To The Top
SEC ISSUES NO-ACTION LETTER EXEMPTING EDUCATIONAL HEALTH PLAN FROM REGISTERING AS AN INVESTMENT COMPANY
4.7.2005 The SEC issued a no-action letter taking the position that a tax-advantaged program providing retiree health benefits to former faculty, staff, administrators and employees ("participants") of colleges, universities, and other higher education-related tax-exempt organizations from having to register as an investment company.
The sponsor of the program, the Emeriti Consortium for Retirement Health Solutions (the "consortium"). The consortium that is an Illinois non-member, non-stock, not-for-profit corporation sponsored the program. The consortium functions principally as a service provider to the plans. The consortium retains outside vendors, including one or more insurers and a third-party administrator to provide the necessary administrative support to maintain the program.
The sponsor of the program is the Emeriti Consortium for Retirement Health Solutions (the "consortium"). The consortium is an Illinois non-member, non-stock, not-for-profit corporation. The consortium functions principally as a service provider to the plans. The consortium retains outside vendors, including one or more insurers and a third-party administrator to provide the necessary administrative support to maintain the program. The consortium chooses the investment alternatives from registered mutual funds offered by Fidelity. Individual participants will be permitted to direct the investment of the funds held in their accounts among mutual funds available through the program.
The Program contains three intertwined components: an employee welfare benefit plan providing medical benefits for former employees and their spouses and dependents, trust-based funding mechanisms to receive plan contributions from sponsoring employers and participating employees, and an educational program to assist employees with integrated planning for post-age 65 health needs in retirement. To participate in the Program, each College will adopt its own retiree medical plan (Plan) which will be funded through two trusts.
Each of the trusts will qualify under Code Section 501(c)(9) as a voluntary employees' beneficiary association trust (VEBA). The incoming letter noted that the Plans will be employee welfare benefit plans. The SEC staff has previously taken the position that participation interests in some employee welfare benefit or similar plans do not create a security that needs to be registered, nor do such plans have to register as an investment company under the Investment Company Act of 1940.
The SEC staff has also issued several letters with respect to registration of welfare benefit plans (and plan participation interests) funded by VEBAs. The consortium successfully argued that the Employee-Contribution VEBAs and Participation Interests are sufficiently like Code Section 403(b) plans and participation interests in 403(b) plans that the SEC staff's prior position about 403(b) plans should apply to the Employee-Contribution VEBAs and the Participation Interests. Accordingly, the Division of Investment Management stated it would not recommend enforcement action to the SEC under Section 7 of the 1940 Act against an Employee-Contribution VEBA if the Employee-Contribution VEBA does not register as an investment company under the 1940 Act.
The Division of Corporation Finance stated it would not recommend enforcement action if an Employee-Contribution VEBA offers and sells Participation Interests without compliance with the registration provisions of the 1933 Act and without registration of the Participation Interests under the Exchange Act.
Please click http://www.sec.gov/divisions/corpfin/cf-noaction/emeriti040705.htm for a copy of no-action letter.
Back To The Top
CFTC HOLDS ROUNDTABLE ON COMMODITY POOL OPERATORS
4.6.2005 The Commodity Futures Trading Commission (CFTC) held a roundtable on Commodity Pool Operators (CPOs) and the commodity pool industry. The roundtable will focus on the growth, innovation and regulation of the commodity pool industry over the last 30 years and the challenges and issues faced by the industry. There are approximately 1,900 CFTC-registered CPOs, which sponsor, operate or advise 3,500 commodity pools, holding more than $600 billion in net assets.
Representatives from the CFTC, SEC, a variety of trade groups, CPOs and law firms participated in the panel.
Please click http://www.cftc.gov/files/ac/ac-transcript0406.pdf to access a copy of the transcript of the roundtable.
Back To The Top
ADVISER SANCTIONED IN HEDGE FUND TRADING ERROR CASE
4.6.2005 The SEC sanctioned EGM Capital,
formerly a registered investment adviser based in San Francisco, CA, and
its chief executive officer, Michael T. Jackson (Jackson), of Belvedere,
California in connection with a trading error.
The SEC found that on two successive days in November 2000 a trader employed by EGM Capital mistakenly oversold a biopharmaceutical stock that was held in several client hedge fund accounts. The trading error resulted in an unintended short position. After the trade error was discovered, EGM Capital covered the short at a loss of approximately $404,000. The order further found that after learning of the trade error, Jackson took the position internally that the hedge fund accounts in which the shares were oversold should bear the loss caused by covering the short position at a loss. Based on his recommendation, EGM Capital treated the erroneous trade as a normal transaction, and allocated the loss to the EGM Capital client hedge fund accounts that had held the oversold stock. To conceal the trade error, EGM Capital created records that gave the false impression that the firm had intentionally sold the biopharmaceutical stock short.
The SEC found that EGM Capital, by taking these actions, violated
Sections 206(1) and (2) of the Investment Advisers Act. The SEC suspended
Jackson from association with any investment adviser for a period of
nine months, and imposed a $75,000 civil monetary penalty against
Jackson.
Please click http://www.sec.gov/litigation/admin/ia-2374.pdf for a copy of the administrative action.
Back To The Top
MUTUAL FUND ADVISER OBTAINS EXTENSION FOR SHAREHOLDER APPROVAL OF ADVIOSRY CONTRACT
4.1.2005 The SEC granted no-action relief to an investment company and its adviser from the shareholder approval requirements of Section 15(a) of the Investment Company Act of 1940.
in June 2004, CIGNA Investment Advisors, Inc. ("CIGNA Advisors"), the Fund's investment adviser, advised the Trust's board of trustees ("Board of Trustees") that it intended, in the near future, to exit the business of serving as investment adviser to registered investment companies. the Board of Trustees commenced a search for a suitable replacement promptly thereafter.
On September 30, 2004, the Fund's portfolio manager retired. When the portfolio manager retired, CIGNA Advisors was unable to continue serving as investment adviser to the Fund. You state that, accordingly, the Board of Trustees on behalf of the Fund entered into an interim investment advisory agreement with Merrill Lynch Investment Managers, L.P. ("MLIM") to provide for uninterrupted portfolio management of the Fund ("MLIM Interim Agreement").
In December 2004, CIGNA Advisors, under the supervision of the Board of Trustees, began discussions with The Dreyfus Corporation (Dreyfus), investment adviser and sponsor of the Dreyfus Stock Index Fund, Inc. (Dreyfus Index Fund), concerning a proposed merger of the Fund into the Dreyfus Index Fund (the Merger).
The Fund decided to solicit the approval of Fund shareholders of the Merger with the Dreyfus Index Fund and expected to consummate the merger by April 30, 2005. The MLIM Interim Agreement terminated on February 27, 2005.
The Fund proposed to have Mellon Equity serve as its investment adviser pursuant to a written investment advisory agreement (Mellon Equity Interim Agreement) that was to be operative only from February 28, 2005 until the Merger was consummated, which was expected to occur no later than April 30, 2005. Mellon Equity will serve under the Mellon Equity Interim Agreement without any compensation or reimbursement of its costs. The SEC staff stated that it would not recommend enforcement action to the SEC against Mellon Equity under Section 15(a) of the Investment Company Act if Mellon Equity serves as investment adviser to the Fund pursuant to the Mellon Equity Interim Agreement, which has not been approved by the vote of a majority of the outstanding voting securities of the Fund and the shareholders had not approved an agreement within 150 days of the termination of the original agreement.
Please click http://www.sec.gov/divisions/investment/noaction/mellon040105.htm for a copy of the no-action letter.
Back To The Top
