SEC AND OTHER REGULATORS ISSUE WHITE PAPER ON STRENGTHENING THE U.S. FINANCIAL SYSTEM
8.30.2002 The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the New York State Banking Department issued a white paper regarding the factors necessary to strengthen the resilience of critical U.S. financial markets in the face of a wide-scale, regional disaster. The sound practices apply most directly to "core clearing and settlement organizations" and "financial institutions that play significant roles in critical markets." Critical markets are defined as the markets for federal funds, foreign exchange, commercial paper, and government, corporate, and mortgage-backed securities.
Please click http://www.sec.gov/rules/concept/34-46432.htm for the release containing the white paper.
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NASDAQ'S SUPER MONTAGE TRADING PLATFORM APPROVED
8.28.2002 The SEC approved Nasdaq's SuperMontage, an advanced trading platform that is designed to give investors easier access to data about the price of shares in the marketplace. SuperMontage will allow users to see a more organized order book for a particular security, including a chronological listing of the bids and offers.
The SEC conditioned its approval of the SuperMontage on the following, which must be implemented prior to or at the same time as the SuperMontage:
- that the NASD will offer a quote and trade reporting alternative that satisfies the Order Handling Rules, Regulation ATS, and other regulatory requirements for ATSs, ECNs, and market makers;
- that NASD quotes disseminated through the exclusive securities information processor ("SIP") for Nasdaq-listed securities will identify the ATS, ECN, or market maker source of the quote;3 and
- that participation in SuperMontage will be entirely voluntary, because NASD quotes will be included in the Nasdaq quotation management system while Nasdaq is the exclusive SIP, but only for display purposes, and the NASD will provide access to its quotes on a market-neutral basis.
Please click http://www.sec.gov/rules/sro/34-46429.htm for the release announcing the approval of the SuperMontage trading platform.
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ADVISER CHARGED WITH FALSE ADVERTISING
8.28.2002 The SEC brought an enforcement action against Market Timing Systems, Inc. ("MTSI"), Mark F. Shinnick and Gregory L. Meadors for disseminating false and misleading advertisements.
The SEC found the advertising to be misleading because:
- It overstated the role the adviser's model (called "MASTERTIMER") played in MTSI's market timing program and failed to disclose the prominent role played by other fundamental and technical factors. In other words, the advertising was based solely on the performance of the adviser's model, which was represented to have produced an average annual return in excess of 70% over a 13-year period, and suggested that the model was the primary, if not exclusive, factor in MTSI's program. In fact, MTSI relied on numerous undisclosed factors in making its market timing decisions, including stock market chart patterns, the current policies of the Federal Reserve, interest rates, the prospect of international conflict or war, and astrology.
- Failed to disclose altogether that the MASTERTIMER results were hypothetical and generated by the retroactive application of a model, and in other cases failed to disclose the relevant limitations inherent in hypothetical results and the reasons why actual results would differ.
- Failed to disclose that MTSI's actual performance with client accounts during its first quarter of operations was materially less than MASTERTIMER's advertised hypothetical results for the same period.
Please click http://www.sec.gov/litigation/admin/ia-2048.htm for the release announcing the administrative action.
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SEC IMPOSES CERTIFICATION REQUIREMENTS ON INVESTMENT COMPANY OFFICERS
8.27.2002 As required by Section 302(a) of the Sarbanes-Oxley Act of 2002, the SEC adopted new Rule 30a-2 under the Investment Company Act of 1940, which will require the principal executive officer and financial officers of investment companies to certify Form N-SAR. In addition, the SEC proposed rules that would apply the certification requirement to mutual fund financial statements. we are proposing to require registered management investment companies to file certified shareholder reports with the Commission on new Form N-CSR and would designate these certified shareholder reports as reports that are required under Sections 13(a) and 15(d) of the Exchange Act. For registered management investment companies, the required reports to shareholders, rather than Form N-SAR, are the primary vehicle for providing financial statements to investors.
The SEC also adopted rules under the Securities Exchange Act of 1934 requiring chief executive officers and chief financial officers of operating companies that are listed on exchanges to certify the quarterly and annual reports of those companies. The SEC also amended the short-swing trading report rules.
The rules also require these officers to certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the issuer's internal controls; they have made certain disclosures to the issuer's auditors and the audit committee of the board of directors about the issuer's internal controls; and they have included information in the issuer's quarterly and annual reports about their evaluation and whether there have been significant changes in the issuer's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.
Please click http://www.sec.gov/rules/final/33-8124.htm for the release adopting the new certification rules.
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NASAA ISSUES TOP TEN INVESTMENT SCAMS
8.26.2002 The North American Securities Administrators Association (NASAA) issued its "Top 10 Investment Scams Listed by State Securities Regulators." New to the Top 10 list are unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.
Please click http://www.nasaa.org/nasaa/abtnasaa/display_top_story.asp?stid=307 for the Top 10 list.
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ADVISER CHARGED WITH CHERRY PICKING
8.20.2002 The SEC brought an enforcement action against Slocum, Gordon & Co. ("SGC"), John J. Slocum, Jr. ("Slocum"), and Jeffrey L. Gordon ("Gordon"), each from Newport, Rhode Island, alleging that they improperly mixed their clients' assets with SGC's own assets. The improper mixing of assets enabled Slocum and Gordon to engage in a practice known as "cherry picking" - allocating profitable stocks to themselves and unprofitable stocks to their clients.
Slocum and Gordon often purchased stocks without identifying whether they were bought for the firm or for clients. They then waited to assign the purchases until just before the settlement date (usually three business days after the purchase), so that they could first determine whether they could make money for SGC. In many instances when the stock price had risen before the settlement date, Slocum and Gordon sold stocks that had originally been intended for clients and credited the profits to SGC. In some instances when the price had fallen before the settlement date, they even assigned stocks originally intended for SGC to clients instead. As a result of these practices, Slocum and Gordon enjoyed extraordinary success in their trading for SGC.
Through these activities: (i) SGC, Slocum and Gordon engaged in the fraudulent offer and sale of securities in violation of Section 17(a) of the Securities Act of 1933, (ii) fraudulent conduct with respect to investment advisory clients, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), and SGC breached its record-keeping requirements under Section 204 of the Advisers Act and Rule 204-2(a)(3) thereunder; and (iv) SGC and Gordon made material misrepresentations and omissions in filings with the Commission, in violation of Section 207 of the Advisers Act. In addition, Slocum and Gordon aided and abetted SGC's violations of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rule 204-2(a)(3) and its failure to comply with Rule 206(4)-2(a)(2), while Slocum also aided and abetted SGC's violation of Section 207 of the Advisers Act.
Please click http://www.sec.gov/litigation/complaints/comp17688.htm for the release announcing the administrative action.
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CFTC NAMES TWO NEW COMMISSIONERS
8.7.2002 The Commodity Futures Trading Commission (CFTC) named two new commissioners -- Walt Lukken and Sharon Brown-Hruska.
Mr. Lukken joins the CFTC after having served four years on the professional staff of the U.S. Senate Agriculture Committee (Committee) under Ranking Member Richard Lugar (R-IN). Before joining the Committee, Mr. Lukken worked for five years in the personal office of Senator Lugar as a legislative assistant specializing in finance and tax matters.
Brown-Hruska's prior position was at George Mason University, where she was an Assistant Professor of Finance in the School of Management. Prior to joining the faculty at George Mason University, she taught at Tulane University and Virginia Tech. Courses taught by Professor Brown-Hruska included Risk Management and Financial Innovation, International Finance, Venture Capital and Private Finance, Investments, and Financial Markets.
From 1990 to 1995, Dr. Brown-Hruska was a staff economist in the CFTC’s Division of Economic Analysis, where she conducted policy and technical research in the areas of anti-competitive behavior and market microstructure of futures, options, and derivatives markets.
Please click http://www.cftc.gov/opa/press02/opa4688-02.htm to access the press release for Mr. Lukken and http://www.cftc.gov/opa/press02/opa4687-02.htm to access the press release for Dr. Brown-Hruska.
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