NASD To Offer Hedge Fund Course
5.30.2006 The NASD will offer an online course, "Hedge Funds: Understanding Sales Practice Responsibilities." The NASD noted that the course explores important sales practice obligations that a representative must follow when recommending hedge funds and/or funds of hedge funds to retail investors.
Based on guidance presented in NASD Notice to Members 03-07, the course covers key topics such as providing a balanced disclosure in sales efforts, performing a reasonable-basis suitability determination and performing a customer-specific suitability determination. The course uses fact-based scenarios to illustrate key issues.
Please click http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_016577&ssSourceNodeId=5 to access a copy of the release.
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PCAOB Standing Advisory Group Will Meet on Internal Controls
5.30.2006 The PCAOB scheduled a Standing Advisory Group meeting for Monday, June 12, from 10:30 a.m. to 6:15 p.m. and Tuesday, June 13, from 9:00 a.m. to 12:30 p.m. at The Army and Navy Club, 901 17th Street, NW, Washington, D.C.
The group will discuss current PCAOB activities regarding implementation of the internal control provisions of the Sarbanes-Oxley Act of 2002 and the PCAOB's Auditing Standard No. 2. In addition, the group will engage in a panel discussion about two aspects of internal control auditing in which the PCAOB may consider refinements to its auditing standard:
- The role of company-level controls in audits of internal control over financial reporting; and
- The auditor's involvement in management's assessment of internal control.
The group will also hear a panel of analysts discuss their compilations of data on corporate disclosures about internal control. The group will then identify and discuss areas of auditing and accounting that, based on this data, may pose special challenges to auditors.
Please click http://www.pcaobus.org/News_and_Events/News/2006/05-30.aspx to access a copy of the release.
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FPA Files Challenging SEC Rule Exempting Brokers from the Advisers Act
5.25.2006 The Financial Planning Association (FPA) filed a reply brief with the D.C. Circuit Court claiming that the SEC does not have a legal basis for exempting broker-dealers from registration as investment advisers under the Investment Advisers Act of 1940.
Please click http://www.fpanet.org/member/govt_relation/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=46936 to access a copy of the brief.
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ICI Issues Survey on Mutual Fund Prospectuses
5.18.2006 The Investment Company Institute (ICI) issued a survey that finds that mutual fund investors focus primarily on fees, historical performance, and risk when purchasing funds. The survey also found that recent fund investors make little use of prospectuses or shareholder reports. Around two-thirds of investors did not consult fund prospectuses or shareholder reports in making their purchase decisions. The research also revealed that nearly three-quarters of investors rely upon professional financial advisers in purchasing funds.
The survey also found that:
- Investors seek out a wide range of information before purchasing mutual fund shares. The elements they find most important are fees (74%), historical performance (69%), risk (61%), performance relative to an index (55%), and sales charge (52%).
- Few investors reviewed information about a fund's portfolio manager (25%, proxy voting policies (15%) or board of directors (15%).
- Nearly 9 in 10 investors expressed a preference for receiving mutual fund information in a summary format containing precise descriptions. They also preferred documents that use charts and graphs over narrative descriptions of investments.
- Mutual fund investors have embraced technology. Recent investors recognize that the Internet is an important communications tool for investment information. Nearly 9 in 10 believe that obtaining information online is the wave of the future and 84% say that online investment information is up to date.
Please click http://www.sec.gov/news/speech/2006/spch051706cag.htm to access a copy of the survey.
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Outgoing NASD CEO Suggests Expanding Point-of-Sale Rule Beyond Mutual Funds to Separately Managed Accounts
5.17.2006 At the ICI General Membership Meeting in Washington, D.C., Robert Glauber, the outgoing Chief Executive Officer of the NASD, stated that mutual fund disclosures at the point of sale need further revision. In addition, he suggested expanding a proposed two-page disclosure document for mutual funds to other products. He suggested expanding disclosure requirements for mutual funds to exchange-traded funds, separately managed accounts, as well as fixed, variable and equity-indexed annuities.
He noted that an NASD task force has been working to develop a two-page disclosure document called Profile Plus, which would summarize a mutual fund's strategies, objectives, performance and risks on the first page and conflicts of interest and costs on the second page.
Please click http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_016648&ssSourceNodeId=5 to access a copy of the speech.
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Commissioner Glassman Speaks on Hedge Fund Regulation
5.17.2006 SEC Commissioner Cynthia Glassman spoke at a Federal Reserve Bank of Atlanta financial markets conference on hedge fund adviser regulation and provided the following statistics:
- At the end of March, 2006, just over 10,000 advisers were registered with the SEC;
- About 2,400 (24%) of these 10,000 advisers are hedge fund advisers;
- Of these 2,400 registered hedge fund advisers, 1,149 (46%) registered with the SEC after adoption of the rule;
- The vast majority of registered hedge fund advisers are based in the U.S. (over 2,100, or 88% of the 2,400 total). In contrast, 165 hedge fund advisers based in the U.K. (7% of the 2,400) are registered with the SEC; and
- Since February 1, the SEC's Office of Compliance Inspections and Examinations has begun 375 inspections of advisers and funds, 88 of which are hedge fund advisers.
Please click http://www.sec.gov/news/speech/2006/spch051706cag.htm to access a copy of the speech.
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Kathleen Casey Nominated as a New SEC Commissioner
5.15.2006 President Bush nominated Kathleen Casey as a new Commissioner to replace Commissioner Cynthia Glassman, who is leaving the SEC at the end of her term. Since 2003, Casey has been staff director of the U.S. Senate Banking Committee, one of two congressional panels that oversees the activities of the investor protection agency. She previously served as chief of staff and legislative director for Richard Shelby, an Alabama Republican.
The SEC has five commissioners appointed by the president and approved by the Senate. Their terms last five years and are staggered, with one term ending each year. No more than three commissioners can belong to the same political party.
The Republican SEC Commissioners are Chairman Christopher Cox, Paul Atkins and Glassman, who is currently the longest-serving member. Roel Campos and Annette Nazareth are Democrats.
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Commissioner Glassman to Leave SEC
5.15.2006 SEC Commissioner Cynthia A. Glassman announced that she intends to leave the SEC after the
completion of her current term. She joined the SEC in January 2002. Ms.
Glassman's current term ends on June 5, 2006. Commissioners
typically remain on the SEC for up to 18 months beyond a term's
completion if they are not replaced.
Prior to being appointed Commissioner, Ms. Glassman spent over 30
years in the public and private sectors focusing on financial services
regulatory and public policy issues. She served 12 years at the
Federal Reserve and spent 15 years in consulting positions in the
private sector.
Please click http://www.sec.gov/litigation/litreleases/2006/lr19664.htm to access a copy of the release.
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Regional CCOoutreach Seminars Announced
5.15.2006 examination staff from SEC field offices
will sponsor regional seminars for mutual fund and investment adviser
Chief Compliance Officers at various locations nationwide this spring
and summer. The seminars are part of the SEC's CCOutreach program
established last year to support the important work that chief
compliance officers perform on behalf of mutual fund investors and
advisory clients.
The CCOutreach regional seminars will feature a case study designed to
illustrate compliance issues that arise with investment advisers of
varying size and complexity. The case study technique will help
outline processes that can be used to create a risk inventory and
determine effective risk-based policies and procedures.
Attendance at the regional seminars will be limited, with CCOs given
priority on a first come, first served basis. Information regarding
the regional seminars, including the dates, locations, and agenda, is
available on the SEC's website at
http://www.sec.gov/info/ccoutreach.htm.
Please click http://www.sec.gov/news/speech/2006/spch041806jhw.htm to access a copy of the speech.
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New Hampshire Adviser Charged with Solicitor Violation
5.9.2006 The SEC settled administrative and cease-
and-desist proceedings against Hutchens Investment Management, Inc.
(HIM), a registered investment adviser based in Concord, New
Hampshire, and its president, William Hutchens, for their violation of various provisions of
the Investment Advisers Act of 1940 by:
- failing to disclose that
it paid a solicitor for referring certain clients;
- failing to
comply fully with the Advisers Act requirement that it establish,
maintain, and enforce policies and procedures to prevent the misuse of
material, nonpublic information;
- misstating its turnover rate to
prospective clients in responses it made to requests for proposals;
- failing to maintain required records relating to soft dollars and
other matters; and
- filing false Forms ADV.
The SEC order censures and imposes a cease-and-
desist order against both HIM and Hutchens; suspends Hutchens from
association with an investment adviser for three months; requires HIM
and Hutchens to pay civil penalties of $40,000 and $25,000,
respectively; and requires HIM to retain an independent compliance
consultant.
Please click http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_016283&ssSourceNodeId=5 for more information about this report.
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Five Federal Agencies Issue Release on Complex Securities
5.9.2006 The SEC, the Federal Reserve Board of Governors, the FDIC, the OCC, and the OTS have requested public comment on a proposed Revised Statement on the complex structured finance activities of financial institutions. The Revised Statement describes the types of internal controls and risk management procedures that are designed to assist financial institutions in identifying, managing and addressing the heightened legal and reputational risks that may arise from certain complex structured finance transactions (CSFTs).
The release noted that financial derivatives for market and credit risk, asset-backed securities with customized cash flow features, specialized financial conduits that manage pools of assets, and other types of structured finance transactions serve important purposes, such as diversifying risks, allocating cash flows, and reducing cost of capital. As a result, structured finance transactions, including the more complex variations of these transactions, now are an essential part of U.S. and international capital markets.
The OCC, Board and SEC also conducted special reviews of several large banking and securities firms that are significant participants in the market for CSFTs. These reviews were designed to evaluate the new product approval, transaction approval, and other internal controls and processes used by these institutions to identify and manage the legal, reputational and other risks associated with CSFTs. These assessments indicated that many of the large financial institutions engaged in CSFTs already had taken meaningful steps to improve their control infrastructure relating to CSFTs.
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Treasury Department Requires Mutual Funds to File SARs
5.8.2006 The Department of the Treasury's Financial Crimes Enforcement Network adopted a rule requiring mutual funds to file reports of suspicious transactions on Form SAR-SF with its FinCEN department. The new rule requires a filing for mutual fund transactions:
- that involve funds or other assets of at least $5,000;
- when the mutual fund knows or has reason to suspect that the transaction involves funds derived from illegal activity;
- that are designed to evade Bank Secrecy Act regulations;
- that have no apparent lawful purpose; or
- that involve use of the mutual fund to facilitate criminal activity.
The new reporting requirement applies to transactions occurring after October 31, 2006. New accounts are required to be in compliance on and after July 5, 2006; for existing accounts (established before July 5), compliance is required by October 2, 2006.
Please click http://www.fincen.gov/finalrule05042006.pdf for release.
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5.5.2006 The SEC sanctioned Vaughn Weimer, a portfolio manager of two money market funds. The SEC found that, between March 2001 and
December 2001, Weimer, a resident of West Islip, New York, engaged in
an investment strategy of purchasing bonds for UTMM and Liquid Green
that exceeded the maturity limit for money market fund securities as
provided by Rule 2a-7 under the Investment Company Act. As a result,
the funds were prohibited from holding themselves out as money market
funds. Weimer also drafted portions of Liquid Green's annual report
for the fiscal year ended September 30, 2001, in which he described
the fund as a "money market fund" and misrepresented that the fund's
investment strategy was appropriate for a "money market fund." As a
result of this conduct, the Commission found that Weimer willfully
violated Section 34(b) of the Investment Company Act by making
material misrepresentations in a report required to be filed with the
SEC and caused the funds to violate Section 35(d) of the
Investment Company Act by holding themselves out as money market funds
when they were prohibited from doing so.
Please click http://www.sec.gov/news/press/2006/2006-61.htm for the press release announcing the new policy.
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Fund Administrator and Fund Accountant Fined for Books and Records and Other Violations
5.5.2006 The SEC brought charges against Unified Fund Services,
Inc. and Michael E. Durham (Order), concerning multiple violations of
the federal securities laws by mutual fund clients of Unified Fund
Services, Inc. (Unified), including the Liquid Green Money Market Fund
(Liquid Green), formerly known as the Unified Taxable Money Market
Fund (UTMM), and the Florida Street Bond Fund (Florida Street).
Without admitting or denying the SEC's findings, Unified
simultaneously agreed to settle the proceedings by consenting to a
cease-and-desist order and payment of a $125,000 civil penalty. In
addition, Unified previously undertook to hire an Independent
Compliance Consultant to assist it in making improvements to its
accounting and compliance procedures. Michael E. Durham (Durham), a
resident of Greenwood, Indiana and Unified's Vice President of Fund
Accounting at the time of the violations, also simultaneously agreed
to settle the proceedings by consenting to a cease-and-desist order.
In its order, the SEC found that Unified made misstatements in
UTMM's and Liquid Green's books and records in violation of Section
34(b) of the Investment Company Act of 1940 (Investment Company Act)
when it erroneously recorded the call dates for certain government
agency bonds as the maturity dates for the bonds. Unified also used
the call dates for purposes of determining the fund's compliance with
Rule 2a-7 under the Investment Company Act . As a result, Unified
caused the funds to hold themselves out as money market funds when
they were not entitled to do so because they did not meet the risk-
limiting conditions of Rule 2a-7, resulting in violations by the funds
of Section 35(d) of the Investment Company Act.
The SEC also found that, from August 1999 through June 2001,
Unified failed properly to account for interest due on bonds in
Florida Street's investment portfolio and, as a result, caused the
fund to materially overstate its interest receivable. As a result of
its accounting errors, Unified and Durham (i) caused Florida Street to
materially overstate its interest receivable; (ii) computed incorrect
net asset values (NAVs) for the fund, and (iii) caused the fund to
sell and redeem its shares at incorrect NAVs. As a result of this
conduct, Unified and Durham made misstatements in Florida Street's
accounting records in violation of Section 34(b) of the Investment
Company Act and caused the fund to violate Rule 22c-1 under the
Investment Company Act by selling and redeeming shares at overstated
NAVs.
Finally, the SEC found that, from 2000 through 2002, Unified
caused several of its clients to file reports with the SEC late
or not at all. As a result of the late filings, Unified aided and
abetted and caused violations of Sections 30(b)(1) and 30(e) of the
Investment Company Act, and Rules 30b1-1 and 30e-1 thereunder, and
Rule 12b-25(a) under the Securities and Exchange Act of 1934.
Please click http://www.ici.org/new/06_sec_22c2_com.html#TopOfPage to access the comment letter.
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Hedge Fund Adviser Charged with Fraud
5.2.2006 The SEC announced that the U.S. District Court of the Northern District of Georgia, entered a default judgment against
defendants Barry A. Bingham (Bingham) and Bingham Capital Management
Corporation (Capital Management) restraining and enjoining them from
future violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934, Sections 206(1)
and 206(2) of the Investment Advisers Act of 1940, and Rule 10b-5
thereunder. The Court also ordered each defendant to pay disgorgement,
prejudgment interest and a civil penalty in the respective amounts of
$1,011,795, $169,835 and $100,000.
The SEC's complaint, filed on August 23, 2005, alleged that, from
approximately April 2001 to November 2002, Bingham used
misrepresentations and omissions of material fact to defraud at least
22 investors in Bingham Growth Partners, L.P. (Growth Partners), a
hedge fund that Bingham created and managed through Capital
Management, an unregistered investment adviser. Bingham offered and
sold at least $1,826,218 of shares in the Fund, and at least $459,483
of these shares were offered and sold through Bingham's
misrepresentations to investors about the Fund's past returns.
Additionally, between July 2001 and November 2002, Bingham
misappropriated approximately $141,637 in Growth Partners' assets, and
by November 2002, the assets of Growth Partners had been wholly
depleted by a combination of Bingham's trading losses and his
misappropriations.
Please click http://www.sec.gov/news/press/2006/2006-52.htm for a copy of the SEC release.
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