ADVISER CHARGED WITH FRAUD RELATED TO SOFT DOLLAR SCHEME
12.23.2002 The SEC instituted public administrative proceedings against Gordon J. Rollert, the former principal of two registered investment advisers, based on Rollert's criminal conviction in a U.S. federal district court. The SEC alleged that, on September 26, 2002, Rollert pled guilty to two counts of wire fraud and one count of mail fraud in connection with a fraudulent soft dollar scheme he conducted through his investment advisory business.
Please click http://www.sec.gov/litigation/admin/ia-2095.htm for the release announcing the administrative action.
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NASD ISSUES NOTICE REQUIRING BROKER-DEALERS TO REVIEW SALES LOAD RECOMMENDATIONS
12.23.2002 The NASD issued a Notice to broker-dealers requiring them to review the adequacy of their policies to ensure that investors are charged the correct sales loads on mutual fund transactions. The NASD stated that the review must include an
assessment by each firm of whether it has been charging investors
the correct sales loads. It further stated that firms must promptly adopt and implement
any changes to their policies and procedures that are necessary
to ensure that investors are charged the correct sales loads on
mutual fund transactions in the future. Each firm also must
retain a record of its review and the results for examination by
NASD.
Please click http://www.nasdr.com/2610_2002.asp#02-85 to access a copy of the notice.
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OFFSHORE FUND ADVISER CHARGED WITH DISTRIBUTING MISLEADING PPM
12.20.2002 The SEC entered a final judgment against Luis Martinez, formerly a registered principal, and an officer and director, of United American International, Inc. ("UA"), a Houston, Texas broker-dealer, and United American Management, Inc. ("UAM"), a Houston, Texas investment adviser, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. The SEC alleged that UA and UAM, while under the control of Martinez and another principal, sold to approximately 560 of their brokerage and/or advisory customers/clients, nearly $70 million in interests in two affiliated offshore funds for which UAM served as the investment adviser. The complaint alleged that the two funds' prospectuses represented that the funds would invest in safe investments and that the return of customers' principal was guaranteed -- both critical factors to UA and UAM customers/clients, nearly all of whom sought safe, conservative investments. However, according to the complaint, the two funds instead engaged in a highly risky investment strategy, by investing in volatile emerging markets debt instruments from countries such as Russia, Venezuela, Brazil, Argentina and Mexico. Ultimately, both funds collapsed, resulting in losses of approximately 50% of investors' principal.
A similar administrative order was issued against Guillermo Wydler.
Please click http://www.sec.gov/litigation/admin/ia-2094.htm for the release announcing the SEC administrative action against Luis Martinez.
Please click http://www.sec.gov/litigation/admin/ia-2093.htm for the release announcing the SEC administrative action against Guillermo Wydler.
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SEC PROPOSES RULE REQUIRING ELECTRONIC FILING AND POSTING OF FORM 3s, 4s AND 5s
12.20.2002 The SEC proposed rules to mandate the electronic filing, and website posting by issuers with corporate websites, of beneficial ownership reports filed by officers, directors and principal security holders on Form 4s, 5s and 6s under Section 16(a) of the Securities Exchange Act of 1934, generally as required by Section 403 of the Sarbanes-Oxley Act of 2002.
Please click http://www.sec.gov/rules/proposed/33-8170.htm for the release containing the rule proposals.
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RULE PROPOSED TO REQUIRE MUTUAL FUNDS TO MAKE QUARTERLY REPORTS
12.18.2002 The SEC proposed a rule that would:
- require a registered management investment company to disclose its complete portfolio schedule on a quarterly basis in filings with the SEC that would be available on EDGAR;
- require a registered open-end management investment company to include in its shareholder reports disclosure of fund expenses borne by shareholders during the reporting period;
- require a registered open-end management investment company to include Management's Discussion of Fund Performance in its annual report to shareholders;
- permit a registered management investment company to include a summary portfolio schedule of investments in its reports to shareholders, provided that the complete schedule is filed with the SEC and is provided to shareholders upon request, free of charge; and
- require a registered management investment company to include a tabular or graphic presentation of its portfolio holdings in its reports to shareholders.
Please click http://www.sec.gov/rules/proposed/ic-25870.htm for the release announcing the proposed rule.
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ADVISER SETTLES FAILURE-TO-SUPERVISE CHARGE
12.13.2002 The SEC settled an administrative proceeding against Millennium Capital Advisors of Pennsylvania, Inc., located in Malvern, Pennsylvania, which is the successor name of Penn Street Advisors, Inc. From February 1999 through April 2000, a portfolio manager employed by Penn Street ("Portfolio Manager") engaged in unauthorized equity trading in an account of one of the firm's advisory clients. The Portfolio Manager was the sole architect and perpetrator of the fraudulent trading.
The Portfolio Manager concealed his unauthorized trading by lying to the client and by creating and sending to the client false account statements for the period April 1999 through July 1999. Penn Street failed reasonably to supervise the Portfolio Manager and lacked adequate systems or procedures designed to prevent or detect such unauthorized trading. Moreover, Sozio, the Portfolio Manager's immediate supervisor, failed to exercise reasonable care in carrying out his supervisory duties. The SEC found that Penn Street's procedures lacked the detail necessary to establish an effective program to detect and prevent fraud. Specifically, the firm's Compliance Manual stated only that "[c]ontrols should include periodic checks, possible reviews and verification procedures." The Compliance Manual did not provide any additional details regarding internal controls for account review or supervision.
The SEC also stated that problems created by the firm's vague procedures were exacerbated by the fact that control over all of Penn Street's trading, compliance, and administrative operations were effectively vested in one person, who was the Portfolio Manager. Most importantly in the SEC's view, the Portfolio Manager:
- determined investment strategies and executed all trades;
- controlled all in-coming and out-going mail, including customer account statements and order confirmations;
- created and maintained all compliance reports; and
- in the case of the client account at issue, created customized account statements, which he was responsible for mailing to the client. Penn Street's procedures did not provide for any independent verification or review of these external and internal reports. The Portfolio Manager took advantage of this lack of separation of controls to operate his fraud without detection by the firm.
Penn Street's inadequate internal procedures, in the SEC's view, were compounded by the firm's failure to follow the few written procedures that did exist as well as his failure to exercise diligence in supervising the Portfolio Manager.
Please click http://www.sec.gov/litigation/admin/ia-2092.htm for the release announcing the administrative action.
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SEC ADOPTS INTERNET ADVISER REGISTRATION RULE
12.12.2002 The SEC adopted amendments to adviser registration rules allowing investment advisers that provide investment advice to almost all of their clients through a website to register with the SEC. The rule amendments will become effective on January 20, 2003.
Please click http://www.sec.gov/rules/final/ia-2091.htm for a copy of the release adopting the rule.
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DECEMBER SEC SPEECHES
12.12.2002 Mary Ann Gadziala, Associate Director, Office of Compliance Inspections and Examinations gave a speech at 2002 Capital Markets Compliance Fundamentals Workshop, Financial Markets Association, Alexandria, Virginia, where she discussed the priorities of the SEC examination program.
Please click http://www.sec.gov/news/speech/spch121202mag.htm to access a copy of her speech.
Paul F. Roye, Director, Division of Investment Management, gave a speech at the Investment Company Institute's 2002 Securities Law Developments Conference in Washington, D.C., where he reviewed recent regulatory developments, legislative mandates (e.g., USA PATRIOT Act and Sarbanes-Oxley Act), and other initiatives of the SEC's Division of Investment Management.
Please click http://www.sec.gov/news/speech/spch120902pfr.htm to access a copy of his speech.
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DONALDSON NOMINATED AS THE SEC's NEW CHAIRMAN
12.10.2002 President Bush nominated William Donaldson as the new SEC chairman. If approved by Congress, Mr. Donaldson would replace Harvey Pitt as the SEC chairman.
Mr. Donaldson is a co-founder of Donaldson, Lufkin & Jenrette. He was also the Chairman of the New York Stock Exchange from 1990 to 1995.
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AUDITOR INDEPENDENCE RULES PROPOSED
12.2.2002 The SEC proposed several rules to implement the auditor independence requirements contained in the Sarbanes-Oxley Act of 2002. The proposed rules will:
- Revise the SEC's regulations related to the non-audit services that, if provided to an audit client, would impair an accounting firm's independence;
- Define the circumstances whereby an issuer's audit committee can and should pre-approve all audit and allowable non-audit services provided to the issuer by the auditor of an issuer's financial statements;
- Prohibit partners on the audit engagement team from providing audit services to the issuer for more than five consecutive years;
- Prohibit an accounting firm from auditing an issuer's financial statements if certain members of management of that issuer had been members of the accounting firm's audit engagement team within the one-year period preceding the commencement of audit procedures; and
- Require that the auditor of an issuer's financial statements report certain matters to the issuer's audit committee, including "critical" accounting policies used by the issuer.
Please click http://www.sec.gov/rules/proposed/33-8154.htm for the release proposing the rule.
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