SEC ADOPTS NUMEROUS RULES IMPLEMENTING PROVISIONS OF THE SARBANES-OXLEY ACT
1.29.2002
Attorney Conduct Rules
The SEC adopted rules, pursuant to Section 307 of the Sarbanes-Oxley Act of 2002, establishing standards of professional conduct for attorneys who appear and practice before the SEC on behalf of public companies.
Please click http://www.sec.gov/rules/final/33-8185.htm for the release adopting the rules.
Auditor Independence Rules
As required by Title II of the Sarbanes-Oxley Act, entitled "Auditor Independence," the SEC adopted final auditor independence rules. These rules prohibit the Funds' independent auditor from providing certain non-audit services, address certain conflicts of interest, require audit partner rotation, and clarify the relationship between the independent auditor and the audit committee, including how they are supposed to interact.
Please click http://www.sec.gov/rules/final/33-8183.htm for the release adopting the rules.
Investment Company Specific Rules
The SEC adopted rules and form amendments requiring registered management investment companies to file certified shareholder reports on new Form N-CSR and making a number of changes to investment companies' filing, certification, and disclosure requirements.
Please click http://www.sec.gov/rules/final/34-47262.htm for the release adopting the rules.
Audit Recordkeeping Rule
The SEC adopted a rule requiring accountants who audit or review an issuer's financial statements to retain certain records relevant to that audit or review, as required by Section 802 of the Sarbanes-Oxley Act.
Please click http://www.sec.gov/rules/final/33-8180.htm for the release adopting the rule.
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NASD ISSUES GUIDANCE ON SALES OF HEDGE FUNDS BY BROKER-DEALERS
1.24.2003 The NASD expressed its concern in a Notice To Members about the sales practices of some of its members who sell direct interests in hedge funds and indirect interests through funds of hedge funds, especially given the recent surge in the popularity of the funds.
The NASD warned that Brokerage firms must fulfill their investor protection obligations when selling hedge funds, including suitability and disclosure." The NASD does not directly regulate hedge funds. However, the NASD stated that it will scrutinize carefully the activities of broker-dealers when they sell those products.
Please click http://www.nasdr.com/news/pr2003/release_03_004.html for a copy of the notice.
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SEC APPROVES MODIFIED PROXY DISCLOSURE RULE
1.23.2003 Despite intense industry opposition, the SEC adopted rules that require funds and investment advisors to reveal how they vote on corporate proxy measures. Chairman Pitt summed up his support by saying that shareholders have a "fundamental right" to know how they are being represented at proxy votes.
Once the rules are enacted, which will be sometime in July, funds and advisors will have to spell out their voting policies and procedures in public filings that will also be available on request. Funds can provide the disclosure on their websites instead of mailing reports to shareholders.
The funds will also have to file a report annually with the SEC detailing their proxy votes for the 12 months that end June 30. Among the issues the filings have to address are who proposed the vote and whether or not the fund voted with management. There will be a two-month window for filing these reports, which must also be supplied to shareholders upon request and free of charge.
Please click http://www.sec.gov/litigation/admin/ia-2095.htm for the release announcing the administrative action.
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ADVISER MISAPPROPRIATES ASSETS OF CLIENTS
1.22.2003 Fred Albert Schluep, an investment adviser located in Red Bluff, California, settled charges brought by the SEC that he misappropriated client assets.
The SEC alleged, among other things, that from September 1991 to March 2001, Schluep misappropriated in excess of $5 million from at least 26 clients by forging his clients' signatures on checks and fund transfer documents and making material misrepresentations and omissions to investors in connection with the purchase or sale of securities. In addition, the Complaint alleged that Schluep made misrepresentations and omissions of material facts to at least two clients in 1999 for the purpose of inducing them to invest over $60,000 in securities that Schluep recommended; Schluep misappropriated the clients' investment funds and never purchased the securities for the clients.
Please click http://www.sec.gov/litigation/admin/ia-2101.htm for the release announcing the administrative action.
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ANTI-MONEY LAUNDERING SUSPICIOUS ACTIVITY RULE PROPOSED
1.15.2003 The Department of the Treasury today issued a rulemaking proposal that would require mutual funds to report suspicious activities to Treasury's Financial Crimes Enforcement Network. The proposal generally would require registered open-end investment companies to report to FinCEN any suspicious transaction, whether or not involving currency, that is conducted or attempted by, at, or through a mutual fund and involves or aggregates funds or other assets of at least $5,000. Other transactions, including those coming under the $5,000 threshold, could be voluntarily reported.
The rule proposal partially implements a report submitted to Congress on December 31, 2002, by Treasury, the Federal Reserve System, and the SEC, containing recommendations for applying anti-money laundering controls to investment companies. The report also recommends requiring unregistered investment companies to establish customer identification and verification programs. No additional regulations were recommended for closed-end funds, unit investment trusts, or personal holding companies.
Please click http://www.nasdr.com/2610_2002.asp#02-85 to access a copy of the notice.
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ADVISER CHARGED WITH FRAUD
1.13.2003 The SEC instituted an administrative action against Robert Sears, an unregistered investment adviser located in Red Bluff, California, alleging that he defrauded his clients of a total of $2,214,485.
Beginning in February 2000, Sears allegedly misappropriated his clients' funds by causing unauthorized transfers from his clients' accounts at several brokerage firms. To accomplish the transfers, Sears either forged his clients' signatures on letters directing the brokerage firms to transfer funds or fraudulently induced clients to transfer funds to the bank account of a corporation co-owned by Sears.
Please click http://www.sec.gov/litigation/admin/ia-2099.htm for the release announcing the administrative action.
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IM DIRECTOR ADDRESSES VARIABLE INSURANCE INDUSTRY
1.12.2003 Paul Roye, the Director of the SEC's Division of Investment Management, gave a speech at the PLI's Understanding Securities Products of Insurance Companies in New York City, where he reviewed recent regulatory developments impacting the variable insurance industry. Topics included the USA PATRIOT Act, the Sarbanes-Oxely Act, and the new attorney conduct rules. He also spoke about the variable insurance registration form, advertising issues, proxy voting disclosure and recent enforcement actions.
Please click http://www.sec.gov/news/speech/spch011003pfr.htm to access a copy of his speech.
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SEC ANNOUNCES ACTING CHAIRMAN OF PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
1.8.2003 The SEC designated Charles D. Niemeier to be the Acting Chairman of the Public Company Accounting Oversight Board. The Board, established by the Sarbanes-Oxley Act of 2002, oversees the audits of the financial statements of public companies through registration, standard setting, inspection and disciplinary programs. Under the Act, the Commission selects members and the Chair of the Board. Niemeier will serve as Acting Chairman until the Commission selects a permanent Chair to replace Judge William Webster, who has resigned from the Board.
Please click http://www.sec.gov/news/press/2003-2.htm for the press release.
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SEC ADOPTS RULE ALLOWING PORTFOLIO AFFILIATE AND SUBADVISER TRANSACTIONS
1.8.2003 The SEC adopted a new rule and several rule amendments governing exemptions for transactions between investment companies and their affiliated persons. The Investment Company Act of 1940 contains a number of provisions that prevent persons who may be in a position to take advantage of a fund from entering into transactions or arrangements with the fund. These include prohibitions on affiliated transactions and joint transactions with affiliated persons.
The amendments expand the rules to permit funds to enter into transactions and arrangements with portfolio affiliates of other funds in the same fund complex (i.e., companies 5% or more of whose securities are owned by other funds in the fund complex).
The SEC has adopted new Rule 17a-10 to permit a subadviser (i) to enter into transactions with funds the subadviser does not advise but which are affiliated persons of a fund that it does advise (e.g., other funds in the same fund complex) and (ii) along with the subadviser's affiliated persons, to enter into transactions and arrangements with funds the subadviser does advise, but only with respect to discrete portions of the subadvised fund for which the subadviser does not provide investment advice.
The SEC also amended Rule 12d3-1 to permit a fund to purchase securities issued by its subadvisers (or affiliated persons of its subadvisers) in circumstances in which the SEC has determined the subadviser would have little ability to take advantage of the fund, because it is not in a position to direct the fund's securities purchases.
Please click http://www.sec.gov/rules/proposed/33-8170.htm for the release containing the rule proposals.
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GOVERNMENT ISSUES ANTI-MONEY LAUNDERING REPORT
1.2.2003 The Department of Treasury, the SEC and other agencies jointly issued the Investment Company Money Laundering Report under the USA Patriot Act. The report clarifies regulators' position on anti-money laundering policies for closed-end funds. It offers background on money laundering risks for different registered and unregistered investment products. The report explains how hedge funds, commodity pools, private equity and venture capital funds, and real estate investment trusts work. It also suggests that these products should be subject to customer identification and other anti-money laundering rules. The report does recommend that mutual funds be subject to the suspicious activity report (SAR) filing rules. Those are requirements that banks have long followed, under which firms must file a report with Treasury when a customer attempts a transaction that could mask money laundering.
Please click http://www.sec.gov/rules/proposed/ic-25870.htm for the release announcing the proposed rule.
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