SEC Announces Study on Regulation of Broker-Dealers and Investment Advisers
6.30.2006 The SEC announced a proposed major study comparing how the
different regulatory systems that apply to broker-dealers and investment
advisers affect individual investors. This study that was initially announced in April, 2005, when the SEC
adopted Rule 202(a)(11)-1, which allows broker-dealers to offer
fee-based brokerage accounts without being required to register as
investment advisers.
The SEC will use an outside contractor for the study. The SEC published its contract solicitation in
draft form, so that it could receive public comment before finalizing
its requirements for the contract. It said that investment advisers,
broker-dealers, self-regulatory organizations, and PCAOB-registered
accounting firms, as well as parties that have expressed a firm public
view on any issue to be addressed in the study, will not be eligible for
the contract.
In the draft Solicitation, the contractor is to interview
interested parties, learn current industry practices, talk to investors,
prepare interview summaries, and prepare a final report on its findings.
The core objectives of the study are to:
- Identify the financial products, accounts, programs and
services, including advisory services such as, for example, financial
planning and discretionary asset management, provided to individual
investors by broker-dealers and investment advisers, and the context in
which they are provided;
- Learn how these products, accounts, programs and services are
marketed to individual investors;
- Determine the fees and costs paid by individual investors for
the products, accounts, programs and services provided;
- Determine how and from what other sources broker-dealers,
investment advisers and their associated persons are compensated for the
different financial products, accounts, programs and services they offer
to individual investors;
- Identify the information provided to individual investors,
whether orally, in sales literature, required statements, or in account
agreements, regarding the products, accounts, programs and services
provided, including the nature of the responsibilities that the
broker-dealer or investment adviser owes to the investor and any
contractual limitations on those responsibilities;
- Evaluate individual investors' understanding of the marketing
and other information provided to them regarding financial products,
accounts, programs and services; and
- Evaluate individual investors' expectations regarding the
obligations owed to them by the investment professional who provided the
financial products, accounts, programs and services.
Comments on the Request for Information and draft Solicitation
are due July 19, 2006.
Please click http://www.sec.gov/news/press/2006/2006-106.htm to access a copy of the press release.
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Morgan Stanley Charged with Having Deficient Insider Trading Procedures
6.27.2006 Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., both of which are registered
broker-dealers and investment advisers, were charged by the SEC with failing to establish, maintain
and enforce written policies and procedures reasonably designed,
taking into consideration the nature of their businesses, to prevent
the misuse of material nonpublic information by Morgan Stanley or any
person associated with it. Morgan Stanley was ordered to pay a $10 million
penalty, and to retain an independent consultant to review Morgan
Stanley's policies and procedures.
Please click http://www.sec.gov/litigation/admin/2006/34-54047.pdf to access a copy of the administrative action.
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Court Vacates Hedge Fund Adviser Registration Rule
6.23.2006 The United States Court of Appeals of the District of Columbia (“D.C. Circuit”) in Goldstein v. SEC overturned Rules 203(b)(3)-1 and 203(b)(3)-2 and certain amendments to related rules under the Investment Advisers Act of 1940, as amended (“Advisers Act”), which had required most advisers to hedge funds to register with the
On December 2, 2004, the SEC adopted Rules 203(b)(3)-1 and 203(b)(3)-2, which collectively required an adviser to a hedge fund to count each of the investors of the hedge fund it sponsored as clients for purposes of determining whether the adviser had to register with the SEC. Under Section 203(b)(3) of the Advisers Act, an adviser with fewer than fifteen clients did not have to register with the SEC. Prior to the adoption of these Rules, the SEC deemed the hedge fund to be the client and advisers that managed fewer than fifteen hedge funds did not have to register with the SEC. New Rule 203(b)(3)-2 required the adviser for the first time to look through the hedge fund to count the fund’s investors as clients of the adviser, with limited exceptions.
As a result of the Rules, over one thousand advisers to hedge funds registered with the SEC on or before February 1, 2006, the compliance date of the rule. One hedge fund adviser elected to challenge the legitimacy of the Rules. Phillip Goldstein, the principal of Bulldog Investors LLC, which manages the Bulldog Funds, filed suit in 2004 against the SEC claiming that the SEC acted in an arbitrary and capricious manner by adopting a rule that deemed investors in a hedge fund to be clients. Goldstein asserted that the Rule misinterprets the term “client” in the Advisers Act to extend to investors in a hedge fund. He argued that the SEC’s prior interpretation of the term “client” should stand and, therefore, hedge fund advisers should count the hedge fund and not the individual investors as the adviser’s client. The SEC countered that the Advisers Act does not define the term client and absent a clear definition in the Advisers Act, the SEC’s interpretation of client for purposes of the Rule is entitled to substantial deference.
The D.C. Circuit sided with Goldstein. In the court’s view, a person or entity is a client of an adviser for purposes of the Advisers Act only when such person or entity receives investment advice directly from the adviser. Since investors in hedge funds do not receive advice from the adviser, and in fact have little interaction with the adviser, the D.C. Circuit ruled that they cannot be clients for purposes of the Advisers Act. The D.C. Circuit also noted that the SEC had previously taken the position that pooled investment vehicles such as hedge funds should be treated as a single client and was not persuaded by the SEC’s rationale for departing from its previous interpretations of the term client.
The SEC has a number of options after the ruling, none of them particularly good. It can appeal the D.C. Circuit’s decision to the Supreme Court. It can revise the rule to require registration on different grounds and re-propose it. It can seek legislation from Congress to amend the Advisers Act to require hedge fund adviser registration. Ultimately, the SEC may decide to table the rule indefinitely, commence another study of the hedge fund industry and wait for legislative action.
Please click http://pacer.cadc.uscourts.gov/docs/common/opinions/200606/04-1434a.pdf to access a copy of the case.
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Financial Newsletter Publisher Charged with Being an Unregistered Adviser
6.22.2006 Weiss Research, Inc., a financial newsletter
publisher, its owner, Martin Weiss, and one of its principal editors,
Lawrence Edelson (Respondents) were charged by the SEC with operating as an unregistered investment adviser. In addition, they were charged with making materially false and misleading statements
about the past performance and profit potential of the trading
recommendations contained in their publications.
Weiss Research publishes several newsletters
containing specific trading instructions for the purchase and sale of
securities, and charges between $1,000 and $5,000 for annual
subscriptions to these newsletters. From September 2001 through March
2005, the SEC found that Weiss Research facilitated an "auto-trading" arrangement between
its subscribers and their broker-dealers, wherein Weiss Research sent
its trading instructions directly to its subscribers' broker-dealers
for immediate and automatic execution in the subscribers' brokerage
accounts. Additionally, Weiss Research promised its subscribers
personalized service through direct contact with Martin Weiss and
Lawrence Edelson regarding their investment advice, and provided
certain assistance with selecting the appropriate type of newsletter
for a particular subscriber. During this period, Weiss Research was
not registered as an investment adviser with the Commission or any
state securities regulator.
The SEC also found that the Weiss Reseach made numerous materially
false and misleading statements regarding the past performance and
profit potential of their recommended trades in Weiss Research's
promotional materials. These claims were inconsistent with the overall
performance of the Respondents' trading recommendations.
Please click http://www.sec.gov/litigation/admin/2006/ia-2525.pdf to access a copy of the administrative action.
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SEC Adopts Fund of Funds Rules
6.20.2006 The SEC adopted three new rules and amendments to
several forms under the Investment Company Act that address "fund of
funds arrangements." Fund of funds arrangements are created when a mutual fund or other
type of investment company invests in shares of another investment
company. Section 12(d)(1) of the Investment Company Act imposes restrictions on these
arrangements to prevent abusive "pyramiding" schemes.
The following is a summary of the three new rules:
- Rule 12d-1-1 permits "cash sweep arrangements," under which a stock
or bond fund may invest its available cash in a money market fund;
- Rule 12d-2 permits greater flexibility to a fund of funds
arrangement that invests exclusively or primarily in funds in the same
fund group.
- Rule 12d-3 permits greater flexibility for a fund that invests small
amounts in many unaffiliated funds to structure the sales load it
charges (but does not increase the overall amount charged).
The SEC also adopted amendments to Forms N-1A, N-2, N-3, N-4, and N-6 require a
registered fund that invests any of its assets in another fund,
including an unregistered fund such as a hedge fund, to disclose in
its fee table the cumulative amount of expenses charged by the fund
and any fund in which it invests.
New rules 12d1-1, 12d1-2, and 12d1 3 will become effective on July 31,
2006. All new registration statements on Forms N-1A, N-2, N-3, N-4,
and N-6, and all post-effective amendments that are annual updates to
effective registration statements on any of those forms filed on or
after Jan. 2, 2007, must include the disclosure required by the form
amendments.
Please click http://www.sec.gov/rules/final/2006/33-8713.pdf to access a copy of the adopting release.
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PIMCO CIO Settles SEC Charges
6.16.2006 Kenneth W. Corba (Corba) settled charges with the SEC. Corba, of Greenwich
Connecticut, is the former chief executive officer,
chief investment officer, and managing director of PIMCO Equity
Advisers Capital LLC, and the portfolio manager for the PIMCO Growth
Fund and the PIMCO Select Growth Fund.
The SEC alleged that he facilitated a scheme to defraud
PIMCO mutual fund investors by negotiating and approving, but not
disclosing, a special market timing arrangement with Canary Capital
Partners (Canary). The Commission's complaint alleged that Corba,
along with his co-defendant, engaged in a scheme to defraud investors
of various PIMCO equity funds by entering into an undisclosed market
timing arrangement with Canary in exchange for Canary's $25 million
investment of "sticky assets" into a PIMCO equity fund. The Complaint
further alleged that Corba negotiated this arrangement despite
disclosures in the PIMCO Funds' prospectus that the PIMCO Funds
discouraged and restricted market timing. Moreover, the Complaint
alleged that Corba managed the PIMCO Growth Fund, which provided $30
million in market timing capacity to Canary, and the PIMCO Select
Growth Fund, which received the $25 million "sticky asset" investment
from which PEA Capital LLC collected management fees.
Please click http://www.sec.gov/litigation/admin/2006/ia-2523.pdf to access a copy of the administrative order.
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SEC Seeks Additional Comments on Fund Governance Rules
6.13.2006 The SEC requested additional
comment on the costs of its investment company governance requirements in response to the opinion of the U.S. Court of Appeals for the
D.C. Circuit's decision that the SEC violated the Administrative
Procedures Act by failing to obtain adequate cost information for the
independent chairman and 75% independent directors governance
requirements.
The SEC requests:
- comment on both monetary and
non-monetary costs of the independent chairman and 75% independent
directors conditions;
- suggestions for additional
provisions designed to achieve the underlying purpose of the amendments,
which is the protection of funds and fund shareholders, and
- comment on any issue related to the underlying purpose of the two
conditions and any issue related to the SEC's required determination
whether the amendments promote efficiency, competition, and capital
formation.
Comments must be received on or before August 21, 2006.
The SEC's General Counsel will conduct a top-to-bottom review of the SEC's process for complying with
the National Securities Markets Improvement Act of 1996 and other laws
that require an economic analysis of rule proposals. The purpose of the review, according to the
press release, is to ensure that the SEC takes full advantage of the
expertise of its professional staff in the operating divisions and in
the Office of Economic Analysis when preparing the legally mandated
analysis of economic impact that must accompany proposed regulations.
Please click http://www.sec.gov/news/press/2006/2006-95.htm to access a copy of the press release.
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Mutual Fund Data Available Online
6.12.2006 The SEC announced that, for the first time, the SEC's information about
companies and mutual funds is now fully searchable online. Investors
and analysts can now search the full text of every SEC document filed
by companies within the last two years. They'll also be able to
quickly and easily identify and retrieve mutual fund filings by fund
or share class.
The new mutual fund search is designed to help fund investors identify
filings by both individual mutual fund and share class. In the past,
searching for information on particular funds and particular share
classes within funds was very difficult, because a single prospectus
might contain information about many mutual funds and share classes.
The new search capability was made possible when the Commission
recently required that filings contain a unique numerical identifier
for each fund and share class. Investors will be able to find relevant
filings by merely searching for the name of their own fund.
Please click http://www.sec.gov/edgar/searchedgar/webusers.htm to access the new search tool.
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No-Action Letter Issued Permitting Certain Principal Trades with a Hedge Fund
6.7.2006 An adviser to a hedge fund and separate accounts from time to time found that, due to timing of capital flows into and out of the accounts, it was disposing of a particular security for one account that it was acquiring for another. The adviser sought relief to cross the trades of a hedge fund with another account and/or hedge fund (the "Proposed Transactions") to, among other things, reduce transaction costs. The adviser was concerned, however, that the adviser, because of its's ownership interest in each hedge fund, may be acting as principal for its own account, thereby subjecting the Proposed Transactions to the transaction by transaction notice and consent requirements of section 206(3) of the Advisers Act.
Section 206(3) of the Advisers Act, in relevant part, makes it unlawful for any investment adviser, directly or indirectly, acting as principal for its own account, knowingly to sell any security to, or purchase any security from, a client without disclosing to such client in writing, before the completion of the transaction, the capacity in which the adviser is acting and obtaining the client's consent to the transaction. Section 206(3) is intended to address the potential for self dealing that could arise when an investment adviser acts as principal in transactions with clients, such as through price manipulation or the dumping of unwanted securities into client accounts. To address this potential for self dealing, section 206(3) requires, among other things, transaction by transaction disclosure to, and consent by, the client prior to the completion of each principal transaction.
The SEC took the position that Section 206(3) would apply to a cross transaction between a client account and an account of which the investment adviser and/or a controlling person, in the aggregate, own(s) more than 25%. In contrast, the SEC staff stated that Section 206(3) would not apply to a cross transaction between a client account and an account of which the investment adviser and/or its controlling persons, in the aggregate, own 25% or less.
Please click http://www.sec.gov/divisions/investment/noaction/gardner060706.htm to access a copy of the no-actionl letter.
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SEC Posts Notice on EDGAR Concerning Corrections After Filings Have Been Accepted
6.7.2006 The SEC posted a notice on its website entitled, "Updating Company Information, IM Post-Acceptance Corrections, Errors Not Involving Post-Acceptance Corrections, Requests by Investment Companies for Withdrawal of 1933 Act Filings, and IM Filing Date Adjustment Requests." The notice discusses correcting errors in EDGAR filings after the filings have been accepted: which errors can be corrected, which cannot, how to request corrections, and how to request withdrawals under Form AW or RW.
Please click http://www.sec.gov/info/edgar/ednews/imedgarpac.htm to access a copy of the notice.
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SEC Issues No-Action Letter Concerning Section 3(c)(7) Exemption
6.6.2006 The letter described SCP Private Equity Partners II, L.P. ("SCP"), a limited partnership that is excepted from the definition of investment company pursuant to section 3(c)(1) of the Investment Company Act of 1940. SCP is a qualified purchaser pursuant to section 2(a)(51)(A)(iv) of the Company Act in that SCP acts for its own account and in the aggregate owns and invests on a discretionary basis not less than $25,000,000 in investments. One or more of SCP's limited partners are not qualified purchasers, as defined in section 2(a)(51)(A) of the 1940 Act.
In order to permit SCP's orderly liquidation and dissolution, SCP intends to form a trust to hold one or more of the 3(c)(7) Interests (the "Trust") for liquidation some time after SCP's liquidation date. The Trust will hold each 3(c)(7) Interest until the issuer of that 3(c)(7) Interest itself disolves, or the 3(c)(7) Interest can be prudently sold. The sole beneficial owners of the Trust will be persons who were SCP's partners at the time of SCP's liquidation date, and each beneficial owner will have an interest in the Trust equal to his or her proportionate interest in SCP at the time of SCP's liquidation date. No-action relief was sought because of the concern that the Trust, even though it will generally meet the definition of qualified purchaser, might be deemed to be "formed for the specific purpose of acquiring the securities offered," and would consequently be unable to meet the definition of qualified purchaser contained in that section.
The SEC staff granted no-action relief agreed that the Trust will not be deemed to have been formed or operated for the specific purpose of acquiring securities of a 3(c)(7) Fund, based on the following factors:
- the activities of the Trust will be limited to liquidating, in an orderly fashion, the 3(c)(7) Interests that are transferred to it by SCP, and distributing the proceeds of the liquidation to the Trust's beneficial owners (as well as activities designed to assure that liquidation and distribution);
- the Trust will terminate upon the complete liquidation of the 3(c)(7) Interests; and
- the sole beneficial owners of the Trust will be persons who were SCP's partners at the time of SCP's liquidation date (except as described herein), and each beneficial owner will have an interest in the Trust equal to his or her proportionate interest in SCP at the time of SCP's liquidation date.
Please click http://www.sec.gov/divisions/investment/noaction/2006/scp060606.htm to access a copy of the no-action letter.
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SEC Charges Adviser for Making False Statements About a Deficiency Letter
6.6.2006 sanctioned CapitalWorks Investment Partners,
LLC ("CapitalWorks"), a San Diego registered investment adviser, and
Mark J. Correnti, age 47, of San Diego, its part-owner and director of
client service and marketing, for making false and misleading
representations to clients and potential clients about the results of
a 2002 SEC inspection. CapitalWorks and Correnti agreed to
settle the charges, without admitting or denying the Commission's
findings, by agreeing to the issuance of a censure, a cease-and-desist
order, and payment of civil penalties of $40,000 and $25,000,
respectively.
In mid-2002, the SEC's investment adviser inspection staff
conducted an inspection of CapitalWorks and issued a "deficiency
letter" to the firm which identified various problems under the
federal securities laws that needed to be rectified. The deficiencies
related to the firm's advertising, marketing and performance, custody
of client assets, assignment of advisory contracts, and internal
controls. The Commission's order found that from August 2002 through
December 2004, CapitalWorks and Correnti misrepresented facts to
current and prospective clients in twelve responses to requests for
information and requests for proposals (RFPs). The RFPs requested
specific information relating to regulatory audits, inspections, or
examinations. Correnti, as CapitalWorks' director of client service
and marketing and head of compliance, had ultimate responsibility for
the accuracy of the responses. He was fully aware of the deficiencies
that had been identified in the SEC's inspection but failed to
ensure their disclosure. For example, in 10 responses to RFPs,
CapitalWorks falsely stated that "[t]he SEC did not find any
deficiencies and required no follow-up actions." In addition, even
though investment advisers were required to adopt written procedures
reasonably designed to prevent violations of the Investment Advisers
Act of 1940 by October 2004, CapitalWorks did not adopt procedures
that would address the inaccurate responses to requests for proposals
until April 2005.
CapitalWorks and Correnti were ordered to:
- to pay civil penalties
of $40,000 and $25,000, respectively;
- undertake
compliance measures designed to prevent future violations;
- retain an independent consultant to review
CapitalWorks' written procedures for responding to requests for
proposals; and
- provide a copy of the SEC's
order to all existing clients and prospective clients for one year.
Please click http://www.sec.gov/litigation/admin/2006/ia-2520.pdf to access a copy of the administrative action.
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Trade Group Proposes Sub-Adviser Due Diligence Materials
6.6.2006 The Investment Company
Institute, the Investment Adviser Association, and legal counsel to
independent directors, have developed a questionnaire and certification
letter to assist their adviser members in due diligence reviews of sub-advisers. The questionnaire and certification letter are designed for annual, rather than initial, use. They can be used in connection with compliance reviews under the Investment Company Act of 1940 ("1940 Act") and the Investment Advisers Act of 1940. In addition, they may used in the solicitation of information requested in connection with an investment company board's
review of an advisory contract under Section 15(c) of the 1940 Act.
Please click http://www.icaa.org/public/due_diligence_review_full.pdf
to access the materials.
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Charges Brought Against Accountant in Connection with Mutual Fund Audit
6.6.2006 David A. Rodriguez, CPA, consented to an order from the SEC related to an enforcement action based on a failed audit of the
financial statements of the Liquid Green Money Market Fund (Liquid
Green). Without admitting or denying the SEC's findings,
Rodriguez simultaneously agreed to settle the proceedings by
consenting to a finding that he engaged in improper professional
conduct and a prohibition from appearing or practicing before the
SEC as an accountant, with a right to apply for reinstatement
after 12 months.
The SEC found that Rodriguez, a former partner in
the accounting firm McCurdy & Associates CPAs, Inc. who currently resides in Santa Fe, New Mexico, engaged in
improper professional conduct during the audit of Liquid Green's
financial statements for the fiscal year ended Sept. 30, 2001. Despite
knowing that more than half of Liquid Green's investment portfolio
consisted of bonds with maturities that appeared to make them
ineligible for a money market fund pursuant to Rule 2a-7 under the
Investment Company Act of 1940, Rodriguez did not perform adequate
audit procedures to review or test the bonds to determine whether they
were in fact eligible for a money market fund. As a result, Rodriguez
failed to detect that the fund's financial statements and related
notes contained material misrepresentations, including that Liquid
Green was a "money market fund" and that it was proper for the fund to
use the amortized cost method to value its portfolio securities.
Because he did not audit Liquid Green's financial statements properly,
Rodriguez caused his firm to issue an audit report with an unqualified
opinion falsely representing that Liquid Green's financial statements
fairly presented the fund's financial position in conformity with
generally accepted accounting principals and that McCurdy & Associates
had conducted its audit in accordance with generally accepted auditing
standards.
In a separate matter, the SEC filed administrative charges against certified public accountant James T. McCurdy over his allegedly flawed performance as the concurring review partner on three mutual fund audits.
The SEC alleged that McCurdy, formerly a partner of
the accounting firm McCurdy & Associates CPAs, Inc. engaged in improper professional conduct in connection
with his firm's audit of the financial statements of the Liquid Green
Money Market Fund (Liquid Green) for the fiscal year ended September
30, 2001, and the firm's audits of the financial statements of the
Florida Street Bond Fund for the fiscal years ended
October 31, 1999 and October 31, 2000.
The Division and the OCA further allege that, during the 2001 Liquid
Green audit, McCurdy became aware that more than half of the
securities in the fund's portfolio had stated maturity dates exceeding
the 397 day period set forth in Rule 2a-7 under the Investment Company
Act of 1940, but nevertheless he did not assure that the engagement
partner performed audit procedures to determine whether the securities
were in fact eligible for a money market fund. As a result, McCurdy
failed to detect that the fund's financial statements and related
notes contained material misrepresentations, including that Liquid
Green was a "money market fund" and that it was proper for the fund to
use the amortized cost method to value its portfolio securities.
Because he did not require the engagement partner to audit Liquid
Green's financial statements properly, and did not do so himself,
McCurdy allowed his firm to issue an audit report with an unqualified
opinion falsely representing that Liquid Green's financial statements
fairly presented the fund's financial position in conformity with
generally accepted accounting principles (GAAP) and that McCurdy &
Associates had conducted its audit in accordance with generally
accepted auditing standards (GAAS).
Please click http://www.sec.gov/litigation/admin/2006/34-53944.pdf for a copy of the Rodriguez order.
Please click http://www.sec.gov/litigation/admin/2006/34-53936.pdf for a copy of the McCurdy order.
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No-Action Letter Permits Reorganization That Does Not Comply with All of the Terms of Rule 17a-8
6.2.2006 The Aggressive Equity Fund, the Small Cap Growth Fund and the Small Cap Value Fund are three portfolios of the Mutual of America Investment Corporation (the "Fund"). The Fund sought to transfer all of the assets of the Aggressive Equity Fund to the Small Cap Growth Fund and the Small Cap Value Fund (together with the Small Cap Growth Fund, the "Surviving Funds"). The Fund is registered with the Commission as an open-end management investment company and serves as an underlying fund to certain insurance company separate accounts.
The Aggressive Equity Fund attempts to achieve its investment objective of capital appreciation by investing in small cap growth stocks (the "small cap growth segment") and small cap value stocks (the "small cap value segment") in a ratio determined from time to time by the adviser. The small cap growth segment, the small cap value segment, and certain cash and short-term positions within each separate segment are the only assets of the Aggressive Equity Fund. The investment practices and policies of the Small Cap Growth Fund are identical to the investment practices and policies of the small cap growth segment, and that the investment practices and policies of the Small Cap Value Fund are identical to the investment practices and policies of the small cap value segment.
The Fund proposes to transfer all of the assets and liabilities attributable to the small cap growth segment to the Small Cap Growth Fund in exchange for shares of the Small Cap Growth Fund, and all of the assets and liabilities attributable to the small cap value segment to the Small Cap Value Fund in exchange for shares of the Small Cap Value Fund ("Proposed Reorganization").
Immediately following the Proposed Reorganization, the Aggressive Equity Fund will distribute to its shareholders (the insurance company separate accounts) the shares of the Surviving Funds in exchange for their shares of the Aggressive Equity Fund. The insurance company separate accounts will hold the Surviving Fund shares on behalf of the variable contract owners who have separate account allocations in the Aggressive Equity Fund. You state that, after the Proposed Reorganization, the Aggressive Equity Fund will then be dissolved. After the Proposed Reorganization, each variable contract owner will be able to determine for himself or herself the portion of his or her assets that are invested in small cap growth and small cap value stocks.
Section 17(a)(1) of the 1940 Act, as relevant here, prohibits any affiliated person of a registered investment company (or any affiliated person of an affiliated person) (collectively, "an affiliate"), acting as principal, from knowingly selling any security or other property to the registered investment company. Rule 17a-8 under the 1940 Act, among other things, provides conditional relief from the prohibitions of section 17(a) for mergers of affiliated funds (or series thereof).
On its face, rule 17a-8 under the 1940 Act does not apply to the Proposed Reorganization because it does not meet the definition of "merger" in paragraph (b)(1) of the rule.
Nevertheless, the SEC granted no-action relief because:
- the Proposed Reorganization will be conducted in accordance with rule 17a-8 under the 1940 Act, other than paragraph (b)(1) of the rule; and
- the Proposed Reorganization entails the transfer of all of the assets and liabilities of the Aggressive Equity Fund, in dissolution of the Aggressive Equity Fund, pursuant to a plan of reorganization and liquidation that will be approved by the Board on behalf of the Aggressive Equity Fund (and the Surviving Funds) and the shareholders of the Aggressive Equity Fund prior to its occurrence.
Please click http://www.sec.gov/divisions/investment/noaction/2006/moa060206.htm for a coyp of the no-action letter.
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