SEC NOTICES NASD COMPLIANCE OFFICER CERTIFICATION RULE
12.31.2003 The SEC noticed an NASD rule proposal on annual certifications of compliance and supervisory processes.
The rule would require each NASD broker-dealer member to designate a chief compliance officer and to have its chief executive officer and chief compliance officer certify annually that the member has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules, and federal securities laws and regulations.
Please click http://www.sec.gov/news/digest/dig112603.txt for a copy of the press release announcing the open meeting.
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REGULATORS SEEK INPUT ON PRIVACY NOTICES
12.31.2003 The following regulators issued an advance notice of proposed rulemaking (ANPR) requesting public comment on ways to improve the privacy notices financial institutions provide to consumers under the Gramm-Leach-Bliley Act (GLB Act):
- Board of Governors of the Federal Reserve System
- Joint Release Commodity Futures Trading Commission
- Federal Deposit Insurance Corporation
- Federal Trade Commission
- National Credit Union Administration
- Office of the Comptroller of the Currency
- Office of Thrift Supervision
- Securities and Exchange Commission
The ANPR describes various approaches that the agencies could pursue to allow or require financial institutions to provide alternative types of privacy notices that would be more readable and useful to consumers. It also seeks comment on whether differences between federal and state laws pose any special issues for developing a short privacy notice.
Please click http://www.ftc.gov/opa/2003/12/privnoticesjoint.htm for a copy of the press release announcing the open meeting.
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ADVISER CHARGED WITH CHERRY-PICKING
12.29.2003 The SEC charged Paul Joseph Sheehan, a registered investment adviser located in West Hollywood, California, with engaging in a fraudulent cherry-picking
scheme whereby he improperly allocated profitable trades to his personal
accounts at the expense of his client's accounts. The SEC also alleged that Mr. Sheehan falsely stated that he
would give absolute priority to client accounts, when, in fact, he did not. If Sheehan engaged in such activity, he would have violated Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 207 of
the Investment Advisers Act of 1940.
Please click http://www.sec.gov/litigation/admin/ia-2207.htm for a copy of the release announcing the administrative action.
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NASD ISSUES INTERPRETATIVE GUIDANCE ON IPOs
12.26.2003 The NASD provided interpretive guidance on Conduct Rule 2790, which governs the allocation of initial public offerings (IPOs). Rule 2790 replaces the Free-Riding and Withholding Interpretation previously issued by the NASD.
The NASD stated that the rule is designed to protect the integrity of the public offering process
by ensuring that:
- NASD members make bona fide public offerings of securities
at the offering price;
- members do not withhold securities in a public
offering for their own benefit or use such securities to reward persons who are
in a position to direct future business to members; and
- industry insiders, including NASD members and their associated persons, do not take advantage of
their “insider” position to purchase “new issues” for their own benefit at the
expense of public customers.
Paragraph (a)(1) of the Rule states that a member or a person associated with a member may not sell,
or cause to be sold, a new issue to any account in which a restricted person has
a beneficial interest, except as otherwise permitted by the Rule. Paragraph
(a)(2) provides that a member or a person associated with a member may not
purchase a new issue in any account in which such member or person associated
with a member has a beneficial interest, except as otherwise permitted by the
Rule. Paragraph (a)(3) provides that a member may not continue to hold new
issues acquired by the member as an underwriter, selling group member,3 or
otherwise, except as permitted by the Rule.
Paragraph (a)(4) sets forth exceptions to the general prohibitions.
Please click http://www.nasdr.com/2610_2003.asp#03-79 for a copy of the interpretive release.
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FRAUD CHARGES BROUGHT AGAINST FINANCIAL ADVISORY CONSULTANTS
12.23.2003 The SEC brought fraud charges against Financial Advisory Service (FAC), alleging that firm was involved with a fraudulent scheme in which over 5,200 investor accounts
purportedly hold investments of over $813 million. The SEC alleges that for almost 20 years,
FAC sold interests in a fund that purportedly invested in equipment leasing and insurance
premium financing programs, and another fund that purportedly buys and
sells distressed businesses. The SEC further alleges that since about
June 2003, FAC has not honored many requests to withdraw
monies by investors in the funds. In addition, the SEC alleges that while FAC has
failed to honor many withdrawal requests, it has been
accepting new investments into the funds, reinvesting the
investors' purported profits in the funds, soliciting
certain investors to make additional large investments in
the funds, and honoring certain investors' withdrawal
requests.
Please click http://www.sec.gov/litigation/litreleases/lr18525.htm for a copy of the administrative action.
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SEC REQUESTS COMMENTS ON MEASURES TO IMPROVE DISCLOSURE OF MUTUAL FUND TRANSACTION COSTS
12.18.2003 The SEC issued a release requesting public comment on
whether mutual funds should be required to quantify and disclose to
investors the amount of transaction costs they incur. In addition, the SEC requests comments on whether mutual funds should:
- include transaction costs in their expense ratios and fee tables;
- provide other
measures or additional disclosure that would indicate the level of a
fund's transaction costs; and
- record transaction costs or the portion of those costs
that represent soft dollar benefits as an expense in their financial
statements.
Please click http://www.sec.gov/rules/concept/33-8349.htm for a copy of the concept release.
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ALLIANCE SETTLES MARKET-TIMING ENFORCEMENT CHARGE
12.18.2003 The SEC settled enforcement action against Alliance
Capital Management, L.P. (Alliance Capital) in connection with its
illegal market timing arrangements. Alliance Capital agreed to pay a total of $250 million (including a
penalty of $100 million), all of which is to be returned to investors
harmed by the violations. According to the SEC, this amount will provide those investors with
full compensation for fund losses due to the illegal market timing
arrangements. In addition, we are requiring Alliance Capital and its
mutual fund boards to adopt significant governance and compliance
reforms.
Please click http://www.sec.gov/litigation/admin/ia-2205.htm to access a copy of the release announcing the administrative action.
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SEC ADOPTS ADVISER AND MUTUAL FUND COMPLIANCE RULES
12.17.2003 The SEC adopted new Rule 38a-1 under the
Investment Company Act of 1940, new Rule 206(4)-7 under the Investment
Advisers Act of 1940, and amendments to Rule 204-2 under the Advisers
Act. The new rule and rule amendments require each investment company
and investment adviser registered with the Commission to adopt and
implement written policies and procedures reasonably designed to prevent
violation of the federal securities laws, review those policies and
procedures annually for their adequacy and the effectiveness of their
implementation, and designate a chief compliance officer to be
responsible for administering the policies and procedures. In the case
of an investment company, the chief compliance officer will report
directly to the fund board. Investment companies and investment
advisers will need to be in compliance with the new requirements on or
before October 5, 2004.
Please click http://www.sec.gov/rules/final/ia-2204.htm for a copy of the release adopting the rule.
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ADVISER CHARGED WITH USING MISLEADING PERFORMANCE FIGURES
12.15.2003 The SEC brought charges against Robert T. Littell, director of investments, and Wilfred
Meckel, principal, of Marque Millennium Group, Inc. (MMG), an
unregistered investment adviser to certain hedge funds called Marque
Partners I (MPI), Marque Partners II and Marque Fund II Limited.
The SEC found that from at least December 1998
through March 2000, MMG, through Littell, communicated materially
inaccurate performance information to limited partners and potential
investors in the Hedge Funds. In addition, from MPI's inception in
October 1997 through March 2000, MMG, through Littell, made various
misrepresentations about the hedge funds' management structure,
retention of an accountant and auditor, and risk management techniques.
Littell also improperly redeemed the full amount of investments by two
large investors at a time when the Hedge Funds had incurred substantial
undisclosed losses, and he took numerous steps to conceal the losses
from investors and from Meckel.
The SEC further found that Meckel failed to take reasonable
supervisory actions. The SEC stated that Meckel could have maintained accurate records of
investments into, and distributions from, the hedge funds, reviewed daily
trading activity, valued the hedge funds' positions, and
separated the hedge funds' trading and back office functions.
Instead, Meckel relied on Littell's reporting and did not independently
verify the performance information and other representations made by
Littell. This delayed Meckel's discovery of Littell's misconduct and
enabled Littell to continue his fraudulent activities.
Please click http://www.sec.gov/litigation/admin/ia-2203.htm for a copy of the administrative action.
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SEC SETTLES SUIT BROUGHT AGAINST MUTUAL FUND DIRECTORS
12.11.2003 The SEC settled a case against the independent directors of the Heartland Group Inc., a mutual fund group (the "Funds"). The SEC's suit had charged that the independent directors were negligent for failing to adequately monitor the
liquidity of the Funds and to take adequate steps to address the Funds'
pricing deficiencies.
In a related settled administrative proceeding, FT Interactive
Corporation consented to the issuance of an order by the SEC finding
that it caused and willfully aided and abetted Heartland Advisor's
violations of the antifraud provisions of the Investment Advisers Act
and a provision of the Investment Company Act requiring that a fund's
NAV accurately reflect the fair value of the securities held by the
fund.
In another related action, the SEC charged the Funds' adviser, Heartland Advisers, and several of its officers, in connection with alleged violations in three primary areas -- fund pricing,
insider trading, and disclosure -- and relate to two high-yield
municipal bond funds managed by Heartland Advisers (the Funds). These
allegations came to light when the Funds, and a smaller related fund,
dropped in value by approximately $93 million between September 28 and October
13, 2000, due to the confluence of months of deliberate mispricing of
the Funds' securities by Heartland Advisers and a cash-flow crisis
related to extensive borrowing to meet investor redemptions.
Please click http://www.sec.gov/litigation/admin/33-8346.htm for a copy of the administrative action.
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SEC PROPOSES DISCLOSURE RULES REGARDING MARKET TIMING AND SELECTIVE DISCLOSURE OF PORTFOLIO HOLDINGS
12.11.2003 The SEC proposed amendments to Forms N-1A, N-3, N-4, and N-6
under the Securities Act of 1933 and the Investment Company Act of 1940.
The proposals would:
- require open-end management investment companies
and variable insurance products to disclose in their prospectuses
information about the risks of, and policies and procedures with respect
to, the frequent purchase and redemption of investment company shares;
- clarify that open-end management investment companies and insurance
company managed separate accounts that offer variable annuities are
required to explain both the circumstances under which they will use
fair value pricing and the effects of using fair value pricing; and
- require open-end management investment companies and insurance company
managed separate accounts that offer variable annuities to disclose
their policies with respect to disclosure of portfolio holdings
information.
Please click http://www.sec.gov/rules/proposed/33-8343.htm for a copy of the release proposing the rules.
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4:00 P.M. DEADLINE PROPOSED FOR MUTUAL FUND TRADES
12.11.2003 The SEC proposed amendments to Rule 22c-1 under the Investment Company Act of 1940 designed to eliminate late trading through fund intermediaries. Under the proposal, all purchase and redemption orders would be required to be received by the fund,19 a single transfer agent designated by the fund and required by written contract to receive order information and maintain a record of the date and time it receives the information ("designated transfer agent"), or a registered clearing agency (e.g., Fund/SERV) no later than the time at which the fund prices its securities (e.g., 4:00 p.m.), in order to obtain the current day's price.20 As a consequence, fund intermediaries, such as broker-dealers, banks, and administrators of retirement plans would have to submit orders to the fund before 4:00 p.m. in order for their customers to receive the 4:00 p.m. price.21 Orders received later would have to receive the following day's price.
Please click http://www.sec.gov/rules/proposed/ic-26288.htm to access a copy of the release announcing the proposed rule.
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SEC CHARGES MUTUALS.COM WITH ILLEGAL MARKET-TIMING
12.4.2003 The SEC charged Mutuals.com, Inc., its CEO, its president, and its compliance officer,
as well as two affiliated broker-dealer firms with fraudulent market-timing. Allegedly, the firm fraudulently helped institutional brokerage
customers and advisory clients to carry out and conceal thousands of
market timing trades and illegal late trades in shares of hundreds of
mutual funds. The SEC also sought, and the defendants consented to, the appointment
of a Special Monitor to oversee the defendants' business operations,
including the management of the Mutuals.com Trust mutual funds (formerly
known as 1-800 MUTUALS Advisor Series), pending resolution of the civil
litigation.
Please click http://www.sec.gov/litigation/complaints/comp18489.htm to access a copy of the release announcing the administrative action.
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INVESTMENT MANAGEMENT DIRECTOR SPEAKS ABOUT MUTUAL FUND SCANDAL AT ICI 2003 SECURITIES LAW DEVELOPMENT CONFERENCE
12.4.2003 SEC Investment Management Director Paul Roye spoke at the ICI's Securities Law Development conference in Washington, D.C. about the recent mutual fund scandal.
Director Roye spoke about certain individuals who were foolish enough to compromise their integrity in order to line their pockets with, what in many cases, was a relatively small amount of profit. These individuals may be facing jail time or, at the very least, loss of career and loss of reputation. He also spoke about
the cost to fund management companies. He stated that "management companies with lax compliance procedures or that looked the other way when their executives, portfolio managers or marketing personnel were engaging in activities that were harmful to shareholders will now pay the price."
Director Roye also reviewed the new compliance rule. He said "I cannot overstate the importance of the chief compliance officer's role in ensuring fund compliance and, ultimately, protecting fund investors. Compliance must be a critical function in any money management organization. Therefore, I encourage you to carefully consider candidates for this position at each advisory firm and further encourage fund directors to choose a candidate who is principled, responsible, firm and determined when designating a chief compliance officer for each fund."
Please click http://www.sec.gov/news/speech/spch120403pfr.htm for a copy of the speech.
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