MUTUAL FUND DIRECTORS FORUM ISSUES "BEST PRACTICES REPORT"
7.29.2004 The Mutual Fund Directors Forum issued a report entitled "Best Practices and Practical Guidance for Mutual Fund Directors." The Report, which was issued in response to a request from the SEC, contains written practical guidance and best practices for independent directors in areas in which director oversight and decision-making is needed for the protection of fund shareholders. The Mutual Fund Directors Forum is as a membership organization of independent fund directors.
Please click http://www.sec.gov/litigation/admin/ia-2254.htm for a copy of the administrative action.
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FPA FILES PETITION CHALLENGING ADVISER EXEMPTION FOR BROKER-DEALERS
7.20.2004 The Financial Planning Association (FPA) filed a petition in the U.S. Court of Appeals in Washington, D.C. challenging a proposed rule by the SEC to expand the exemption for broker-dealers otherwise subject to the fiduciary and disclosure standards of the Investment Advisers Act of 1940.
The SEC on Nov. 4, 1999, proposed a rule exempting fee-based brokerage programs from the fiduciary and disclosure standards of the Advisers Act. In the petition, the FPA argues that the SEC violated the intent of the federal Administrative Procedures Act by not completing its rulemaking process in timely fashion, and for misinterpreting its authority under the Advisers Act in crafting a new exemption.
Please click http://www.fpanet.org/member/press/releases/072004_lawsuit.cfm to access a copy of the speech.
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SEC PROPOSES RULE TO REQUIRE REGISTRATION OF HEDGE FUND ADVISERS
7.14.2004 The SEC voted 3-2 to propose Rule 203(b)(3)-2 that would require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940. The proposed new rule would require advisers to "private funds" to register with the Commission by requiring the advisers to "look through" the funds and to count the number of investors (rather than the fund) when determining whether the advisers are eligible for the Adviser Act's exemption for advisers with 14 or fewer clients. The rule would require advisers to count limited partners and shareholders of certain unregistered investment funds as “clients”.
A "private fund" would be one that:
would be an investment company but for the exceptions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940;
permits owners to redeem their ownership interests within two years of purchase; and
is offered based on the investment advisory skills, ability or expertise of the investment adviser.
The proposed rule would contain special provisions for advisers located outside the United States designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S. investors. Comments on the proposal are due by September 14, 2004 to the SEC.
Please click http://www.sec.gov/rules/proposed/ia-2266.htm for a copy of the proposing release.
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OCIE ASSOCIATE DIRECTOR SPEAKS ON BRANCH OFFICE SUPERVISION
7.13.2004 Mary Ann Gadziala, Associate Director in the Office of Compliance Inspections and Examinations (OCIE), gave a speech entitled "Effective Branch Office Supervision Fosters Investor Protection" at the NASD Branch Office Supervision conference in Boston, Massachusetts.
She gave an overview of the regulations, noting the basic legal requirement for branch office supervision arises from Section 15(b)(4)(E) of the Securities Exchange Act of 1934. That provision authorizes the SEC to censure, place limitations on activities, or suspend or revoke the registration of any broker-dealer, or any associated person, for failure to reasonably supervise another person who commits a violation if the person is subject to his supervision. NASD Rule 3010(a) requires broker-dealers to establish and maintain written procedures reasonably designed to achieve compliance with applicable securities laws, rules and regulations.
She covered the the basic steps in designing a branch office supervisory program. She stated that a clear message about the importance of compliance and supervision should be conveyed from top management to all employees. Policies and procedures should be made available to all relevant employees and the employees should be trained to properly implement them.
Please click http://www.sec.gov/news/speech/spch071304mag.htm to access a copy of the speech.
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BANK CUSTODIAN UNIT SETTLES CHARGES THAT IT CONTRIBUTED TO ADVISER'S VIOLATION OF BOOKS AND RECORDS RULE
7.12.2004 Wilmington Trust served as custodian
for certain assets of an advisory client of Landis Associates, LLC
(Landis), a registered investment adviser, and Michael L. Hershey, its
president. Pursuant to the custodial agreement, Wilmington Trust was
required to prepare account statements reflecting the advisory client's
assets held in the custody account. The Order finds that on forty-six
occasions from July 1998 through July 2000, the chief financial officer
of Tremont Medical, Inc., a private company, with Hershey's approval and
authorization, sent false instructions to Wilmington Trust to disburse
funds supposedly for the purchase of Tremont common stock, in an amount
totaling $8.1 million. In reality, the disbursements were cash
advances.
In reliance on and in accordance with these instructions,
Wilmington Trust recorded these cash advances as the purchase of common
stock. As Tremont stock had no readily ascertainable market value,
Wilmington Trust then prepared account statements reflecting purchases
of common stock at $1.00 per share with a market value of $3.25 per
share, assigning these values based on certain prior transactions,
without objection from Hershey. Wilmington Trust then sent these
statements each month to the advisory client, Hershey and Landis.
Wilmington Trust did not obtain stock subscription agreements, stock
certificates, or other documents to support these transactions. As a
result, the account statements it prepared and sent contained erroneous
information about the nature and value of the investments in Tremont.
The SEC found that Wilmington Trust was a cause of Landis' violations
of Section 204 of the Investment Advisers Act and Rules 204-2(a)(3) and
(7) thereunder, which require registered investment
advisers maintain and preserve accurate books and records.
Please click http://www.sec.gov/litigation/admin/ia-2261.htm for a copy of the administrative order.
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INDIVIDUAL CHARGED WITH CREATING FICTICIOUS ACCOUNT STATEMENTS TO COVER UP SCHEME
7.9.2004 The SEC issued an order against Mark Coleman, alleging that he, acting in association with an investment adviser, raised approximately
$8.5 million from more than thirty clients by promising to invest the
money in offshore "trading programs" that would generate returns of four
to seven percent per month, or the equivalent of 48 to 84 percent per
year. The SEC found that Coleman and others lost approximately
$6 million of their clients' funds in their attempts to invest in such
"trading programs," then sent their clients fictitious account
statements concealing the losses. The SEC further found that Coleman
continued to encourage clients and prospective clients to deposit money
with him without disclosing the losses.
Please click http://www.sec.gov/litigation/admin/ia-2260.htm for a copy of the administrative order.
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NEW SEC RULE WILL REQUIRE ADVISERS TO HAVE A CODE OF ETHICS
7.2.2004 The SEC adopted new Rule 204A-1 under the Investment Advisers Act of 1940 that requires SEC-registered investment advisers to adopt codes of ethics by January 7, 2005. The key provision of the rule is the requirement that advisers' employees report their personal securities holdings and transactions, including those in affiliated mutual funds.
Most investment advisers, as a best practice, have had Codes of Ethics governing personal trading for years. Advisers to mutual funds under the Investment Company Act of 1940 were already required to have a Code of Ethics. The rule requires an adviser's code of ethics to set forth a standard of business conduct that the adviser requires of all its supervised persons. This is a new requirement that has not appeared in most Codes of Ethics. The SEC wants a code of ethics to set out ideals for ethical conduct premised on fundamental principals of openness, integrity, honesty and trust.
The SEC’s final rule did not require advisers to have pre-clearance procedures (except certain very limited circumstances) or black-out employee trades during certain periods. In the release adopting the rule, the SEC noted, however, that many advisers have these types of procedures. In addition, these procedures are likely the most effective way of preventing an employee (and its adviser) from inadvertently violating the Advisers Act when making a personal securities trade (e.g., by front running an advisory client trade).
Please click http://www.sec.gov/rules/final/ia-2256.htm to access a copy of the rule.
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