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Regulation B Timetable Announced
9.29.2006 SEC Chairman Christopher Cox announced that following the recent passage of the Financial Services Regulatory Relief Act of 2006 by Congress, he expects that the SEC will complete work by year end on proposed new rules to implement the bank/broker-dealer provisions of the Gramm-Leach-Bliley Act. Under the provisions of the Regulatory Relief Act, the SEC and the Federal Reserve have 180 days from the date the President signs the bill into law to jointly propose final rules. The rules will define the circumstances under which a bank can engage in securities activities without registering as a broker. Chairman Cox stated that the SEC, the Federal Reserve, the FDIC, and the Comptroller of the Currency have been working over the past six months to put needed clarifications in place.
In June 2004, the SEC proposed to replace its interim rules with new Regulation B. That effort was never completed.
He expectats that proposed new rules will be issued by December 31, 2006. The SEC also extended the current exemption from the definition of "broker" until January 15, 2007.
Please click http://www.sec.gov/news/press/2006/2006-169.htm to access a copy of the press release announcing the proposal.
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SEC Settles Revenue Sharing Case with Deutsche Asset Management
9.28.2006 The SEC settled a revenue sharing case with Deutsche Investment
Management Americas, Inc. (DIMA), Deutsche Asset Management, Inc.
(DAMI), and Scudder Distributors, Inc. (SDI), the investment advisers
and principal underwriter and distributor affiliated with the the
Deutsche/Scudder Family of Funds Complex (the Funds).
The SEC found that DIMA, DAMI and SDI failed to adequately communicate certain
material facts to shareholders in the Scudder Funds and the boards of
directors of the Scudder Funds , including potential
conflicts of interest that arose from SDI's arrangements with certain
broker-dealers for marketing and distribution of the Scudder Funds
within the broker-dealers' distribution systems, commonly known as
"revenue sharing."
Specifically, the SEC found that between January 1, 2001 and October 2003, SDI entered into revenue
sharing agreements with broker-dealers to gain additional
exposure for the Funds. These agreements provided for placement
on certain broker-dealers' preferred or recommended fund lists,
increased access to broker-dealers' registered representatives,
placement on the brokers' websites, and participation in broker-
dealer conferences, among other things. In addition to making
cash payments for these revenue sharing agreements, SDI entered
into agreements with eighteen broker-dealers to direct brokerage
commissions on transactions that DIMA and DAMI placed for the
Funds to particular broker-dealers, in exchange for the broker-
dealers' agreement to reduce or eliminate the Respondents'
revenue sharing costs.
The SEC stated that DIMA and DAMI failed to effectively communicate to the Fund
Boards or to shareholders that SDI used fund brokerage
commissions to satisfy its revenue sharing agreements. The
failure to communicate these facts was a material omission that
should have been disclosed to avoid misleading the Fund Boards
and shareholders.
Please click http://www.sec.gov/litigation/admin/2006/34-54529.pdf to access the release for the administrative order.
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Adviser Charged with Defrauding Mutual Funds
9.26.2006 The SEC issued an administrative order against against James A. DeMatteo of Staten Island, New
York. DeMatteo was the president and part owner of Cornerstone Equity
Advisors, Inc. (Cornerstone), an investment adviser registered with
the SEC. The proceeding
arises from DeMatteo's participation in a scheme to defraud
Cornerstone's advisory client, the Cornerstone Funds (the Funds), a
family of mutual funds.
The SEC found that from November 2001 through February 2002 DeMatteo
participated in a fraudulent billing scheme that caused Cornerstone to
misappropriate $126,741 from the Funds. Along with another associated
person of Cornerstone, DeMatteo doctored invoices submitted to the
Funds' by certain service providers to request payments in excess of
the amounts actually due. They then instructed the Funds'
administrator to pay a related entity rather than pay the providers
directly. When the inflated payments reached the bank account of the
related entity, DeMatteo, who controlled the account, paid the service
providers the actual amounts invoiced. DeMatteo used the excess amount
billed to the Funds to pay salaries, which were increased during the
three month period, and other expenses including office rent, health
insurance, car service, meals and credit cards.
Please click http://www.sec.gov/litigation/admin/2006/ia-2556.pdf to access a copy of the administrative order.
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No-Action Letter Allows Sponsor of a UIT to Redeem In-Kind
9.26.2006 Citigroup Global Markets Inc. ("CGMI") is a broker dealer and serves as the sponsor (the "Sponsor") to numerous series of unit investment trusts (the "Trusts"). The Sponsor is also a promoter and a principal underwriter for each Trust. Each unit of a Trust (a "Unit") represents a fractional undivided interest in the securities of the Trust ("Securities"), and such Securities are held by the Trustee for the benefit of Unit holders (the "Holders").
When a Holder wishes to redeem Units, the Holder tenders the Units to the Sponsor, which may purchase the tendered Units with its own money. The Sponsor becomes the owner of the Units and acts as principal when its tenders the Units to the Trust for redemption.
The Sponsor received no-action relief from Section 17(a)(2) of the Investment Company Act of 1940 to allow the Trust, upon a request for an in kind redemption by the Sponsor, to distribute to the Sponsor its proportionate share of every Security in the Trust's portfolio. The in kind redemption would be effected based upon the price per Unit computed by the trustee of the Trust as of the 4:00 p.m., Eastern time (or earlier close of the New York Stock Exchange) next following the tender of any Units for redemption. The evaluator of the Trust would value the Securities to be distributed in the in kind redemption in the same manner as they are valued for purposes of computing the distributing Trust's net asset value. would distribute to the Sponsor its proportionate share of every Security in the Trust's portfolio. The in kind redemption would be effected based upon the price per Unit computed by the trustee as of the 4:00 p.m., Eastern time (or earlier close of the New York Stock Exchange) next following the tender of any Units for redemption. The evaluator would value the Securities to be distributed in the in kind redemption in the same manner as they are valued for purposes of computing the distributing Trust's net asset value.
Please click http://www.sec.gov/divisions/investment/noaction/2006/citigroup092606.htm to access a copy of the no-action letter.
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Mutual Fund Information Sharing Rule Effective Date Delayed to 2007
9.26.2006 The SEC voted to approve the information sharing provisions of new Rule 22c-2, but extend the compliance date of these provisions until April 16, 2007. The rule, which the SEC originally adopted in 2005, requires most mutual funds to enter into shareholder information agreements with intermediaries, such as broker-dealers, that hold shares on behalf of other investors. To help funds enforce restrictions on market timing and similar abusive transactions, these agreements provide funds access to information about the identity of customers involved in such transactions, including those made through so-called omnibus accounts. The rule as originally adopted had a compliance date of October 16, 2006.
The SEC also approved the amendments to Rule 22c-2 requiring either funds to impose a redemption fee of 2% of the value of shares redeemed shortly after their purchase or for the board of directors to consider and find that the imposition of such fee is not necessary. The compliance date of the redemption fee rule is October 16, 2006.
Please click http://www.sec.gov/rules/final/2006/ic-27504.pdf to access a copy of the release adopting the rule.
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BISYS Fund Services to Pay $28 Million Penalty in Connection with Improper Arrangements with Investment Advisers
9.26.2006 SEC announced that BISYS Fund Services of Columbus, Ohio will pay $21 million to settle fraud charges in connection with improper marketing arrangements with 27 mutual fund advisers. The SEC found that BISYS entered into undisclosed side agreements with the advisers, which enabled the advisers improperly to use investors' mutual fund assets to pay for marketing expenses rather than paying for those expenses out of their own assets.
BISYS provides numerous administration services to mutual fund families for a fee. The SEC found that from July 1999 to June 2004, BISYS entered into side agreements with the investment advisers to 27 mutual fund families. These side agreements obligated BISYS to rebate a portion of its fund administration fee to (or on behalf of) the investment advisers to the funds so that the advisers would continue to recommend that BISYS be retained as the fund administrator. The side agreements enabled the advisers to use mutual fund assets to pay for marketing expenses that were incurred by the advisers to promote the funds. On occasion, the investment advisers also used the money dedicated by BISYS under these arrangements to pay expenses that were entirely unrelated to marketing, such as for check fraud losses, seed capital for new mutual funds, and settlement of disputes with third parties. If the investment advisers had not improperly used mutual fund assets to subsidize these expenses, the advisers would have had to pay the marketing and other expenses using their own assets. BISYS provided over $230 million from its administration fees for the benefit of the funds' advisers or third parties pursuant to these side agreements. The SEC further found that these side arrangements were not disclosed to the mutual funds' boards of trustees or shareholders.
Please click http://www.sec.gov/litigation/admin/2006/ia-2554.pdf to access a copy of the administrative action.
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SEC Awards RAND Corporation a Contract to Conduct a Study Comparing Roles of Investment Advisers and Broker-Dealers in the Financial Services Industry
9.26.2006 The SEC awarded the RAND Corporation of Santa Monica, California a contract to conduct factual research and analysis for a major study comparing how the different regulatory systems that apply to broker-dealers and investment advisers affect investors.
The SEC first suggested a study in connection with a rule adopted in April 2005, allowing broker-dealers to offer fee-based brokerage accounts without being required to comply with the Advisers Act. The rule was the subject of a large number of comments. The SEC determined, however, that many of the concerns that commenters raised in the rulemaking went well beyond the scope of the proposed rule, and thus were best addressed by the study. The study RAND will conduct will explore those concerns and examine how the different regulatory regimes affect investors.
Consulting with the SEC's professional staff, the RAND Corporation will collect, categorize, and analyze empirical data from a wide variety of sources. RAND will study information on subjects such as the ways in which broker-dealers and investment advisers market, sell, and deliver financial products, accounts, programs and services to individual investors. Among the tasks to be performed under the contract, RAND will conduct interviews of interested parties, including industry groups, regulators, and investor advocates; will conduct an extensive search of relevant economic and business literature; will collect relevant business documents; will interview broker-dealers, investment advisers, and their respective associated persons; will conduct investor focus group interviews; and will summarize and evaluate the data for the SEC's use in assessing the current legal and regulatory environment.
Please click http://www.sec.gov/news/press/2006/2006-162.htm to access a copy of the SEC press release announcing the contract award.
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SEC Enforcement Chief Testifies About Responsibilities of Advisers and Broker-Dealers to Prevent Insider Trading
9.26.2006 SEC Enforcement Director Linda Chatman Thomsen testified before the Senate Judiciary Committee on insider trading. She reviewed recent insider trading cases brought by the SEC.
She noted that the SEC has brought at least three cases in the past two years involving insider trading by hedge funds and their managers in advance of PIPEs offerings. "PIPE" is an acronym for "private investment in public equities," a form of stock offering often used by distressed companies to raise capital when they are unable to obtain financing by other means. She also noted that the SEC recently brought two cases against hedge funds involving insider trading ahead of mergers and acquisitions.
Significantly, she testified about the potential liablity of investment advisers and broker-dealers in insider trading cases. She stated that these entities shoulder the primary responsibility for supervising the professionals who work for them. A few months ago, the SEC instituted a settled administrative proceeding against Morgan Stanley for its failure to maintain and enforce adequate written policies and procedures to prevent the misuse of material nonpublic information by the firm or persons associated with it. There was no evidence that material nonpublic information was misused as a result of that failure. Morgan Stanley agreed to pay a $10 million civil penalty, as well as to engage an independent consultant to conduct a review of its policies, practices and procedures, and to recommend changes to those policies to prevent the future abuse of such nonpublic information. Morgan Stanley is the most recent in a line of cases in which the SEC has consistently made clear that broker-dealers and investment advisers are responsible for designing and enforcing policies to prevent the misuse of insider information.
Please click http://www.sec.gov/news/testimony/2006/ts092606lct.htm to access a copy of the testimony.
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SEC To Hold Second Interactive Data Roundtable
9.25.2006 The SEC held its second in the series of interactive data roundtables. This roundtable focused on new software to make better information a reality by using interactive data to provide investor-friendly research tools. Presenters demonstrated a sample of currently available software and panelists will discuss how interactive data enabled software can assist investors.
The first roundtable in the series was held on June 12, 2006. The morning session of that roundtable focused on improving the quality of mutual fund disclosures and technology to provide mutual fund investors with better information. The afternoon session covered what investors and analysts are looking for in interactive data and how to accelerate the use of new software that permits the dissemination of interactive financial data. A subsequent roundtable discussion relating to preparers using interactive data will be held later in the winter.
Please click http://www.sec.gov/news/press/2006/2006-160.htm to access a copy of the press release announcing the roundtable.
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SEC Division of Investment Management Director Speaks at Compliance Conference
9.25.2006 Andrew J. Donohue, Director of the SEC's Division of Investment Management, spoke before the IA Week's 6th Annual Fall Compliance Conference in New York.
After speaking about the role of chief compliance officers and diversity in the investment management industry, he listed the following priorities for the Division of Investment Management related to investment advisers:
- Completion of the Investment Adviser/Broker-Dealer Study;
- Updating the books and records rules under the Investment Advisers Act of 1940;
- Reproposing and adopting Part 2 of Form ADV;
- Providing guidance to mutual fund boards and others regarding the review of adviser soft dollar practices; and
- Drafting an anti-fraud hedge fund client rule.
Please click http://www.sec.gov/news/speech/2006/spch092506ajd.htm to access a copy of the speech.
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SEC Division of Investment Management Director Speaks at About ETFs
9.25.2006 Andrew J. Donohue, Director of the SEC's Division of Investment Management, spoke at the 4th Annual Art of Indexing Summit in Washington, D.C. He reviewed the ETF landscape.
He next spoke about the ETF exemptive application process. He stated that earlier this year, the Division of Investment Management, at both a staff and supervisory level, began a targeted focus on what we consider to be routine index ETF applications. According to the Director, the staff is prioritizing the review of these types of applications as "time sensitive," especially in light of the fact that an ETF, unlike applicants for many other types of exemptive relief, cannot commence any operations prior to the receipt of an exemptive order. He further stated that the most significant initiative is that his staff is beginning to develop a proposal for an ETF rule under the Investment Company Act.
Director Donohue reviewed the status of the proposed actively-managed ETFs. A major issue the SEC has to tackle with respect to active management of ETFs is transparency. Transparency, to date, has been a hallmark of ETFs, and much of the efficient trading in ETF shares has been attributed to the high degree of transparency in ETF portfolios. However, many portfolio managers of actively managed funds will tell you that too much transparency can diminish the manager's ability to deliver positive performance because it may telegraph the manager's moves to the marketplace. In the context of proposals for actively managed ETFs, the SEC likely will be called upon to assess the extent to which transparency is critical to the ETF structure, and to make recommendations to the full Commission as to how this issue should be addressed.
The final topic he discussed was disclosure, noting that the SEC is in the midst of a wholesale review of the investment company disclosure regime — which includes a review of ETF disclosure.
Please click http://www.sec.gov/news/speech/2006/spch092006ajd.htm to access a copy of the speech.
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Adviser Sanctioned for Having Illegal Client Solicitation Arrangement
9.22.2006 The SEC sanctioned Jeffrey A. Dunham, of Del
Mar, Califorina, and his company Dunham & Associates Investment Counsel,
Inc. (DAIC), an investment adviser and broker dealer located in San
Diego, California, for violating the investment company and securities
registration provisions of the federal securities laws by improperly
soliciting over $350 million in investments in thirteen unregistered
investment funds.
The SEC found that from August 1999 to November 2004,
the adviser used a "common trust fund" to publicly offer and sell
investments in thirteen unregistered funds as a purported alternative
to registered mutual funds. The adviser structured the common
trust fund and the other thirteen funds in an unsuccessful attempt to
avoid the regulatory and registration requirements of the federal
securities laws. As of December 31, 2003, nearly 1700 investors had
invested over $350 million in the common trust fund, which invested
exclusively in the thirteen unregistered funds. The amounts invested
in the common trust fund included 748 IRAs with $128.7 million
invested. The investors who invested with these entities did not
receive fundamental investment information to which they were entitled
under the federal securities laws.
A common trust fund is generally a pool of funds maintained by a bank
(or trust company) exclusively for investment by the bank in its
fiduciary capacity on behalf its clients. Under certain conditions,
common trust funds do not have to register under the Investment
Company Act or the Securities Act. Generally, these conditions are
designed to ensure that common trust funds are used by a bank, in its
fiduciary capacity, solely as an aid to administer its fiduciary
clients' accounts and not as a separate investment vehicle. Here, the
advisers improperly used a common trust fund as a separate
investment vehicle for unsophisticated investors to invest in the
advisers' unregistered funds.
Accordingly, the SEC found that the common trust fund
and eleven of the thirteen unregistered funds operated as unregistered
investment companies, in violation of the federal securities laws. In
addition, the order finds that the offer and sale of the common trust
fund's securities and the securities of the other thirteen funds
should have been registered.
Please click http://www.sec.gov/litigation/admin/2006/33-8740.pdf to access a copy of the speech.
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Informatin About the CCOutreach Progarm is Posted
9.15.2006 The SEC posted the following three documents from the CCOutreach seminar held in the Spring of 2006:
Please click http://www.sec.gov/news/digest/2006/dig080806.txt to access the release announcing the SEC's decision.
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Adviser Settles Performance Fee Case
9.7.2006 Kensington Investment Group, Inc.
(Kensington), based in California, settled a case in which the SEC claims that the company collected excessive advisory fees.
The SEC found that Kensington received more than
$617,000 in excessive advisory fees as a result of charging improper
performance-based fees to the Kensington Strategic Realty Fund (Realty
Fund). The SEC found that Kensington willfully violated Section
205(a) of the Investment Advisers Act. Section 205(a) requires fund
managers to calculate performance-based fees-fees based primarily on
fund performance measured against an external benchmark-using the
average value of the fund's assets over the same period that is used
to measure the fund's performance. The SEC found that
Kensington's advisory contract with the Realty Fund did not provide
for assessing the performance-related portion of its total advisory
fee against the fund's average net assets over the same period in
which performance was measured.
Upon notification by the SEC staff that Kensington was charging
the Realty Fund a total advisory fee based on a method that did not
comply with Section 205(a) of the Advisers Act, Kensington's
management discontinued the method and subsequently reimbursed the
fund $617,098 plus interest of 173,864, for a total payment of
$790,962. Pursuant to its offer of settlement, Kensington neither
admitted nor denied the findings in the administrative order.
Please click http://www.sec.gov/litigation/admin/2006/ia-2545.pdf to access a copy of the administrative order.
The SEC settled similar cases with other investment advisers on the same day.
Please click http://www.sec.gov/litigation/admin/2006/ia-2548.pdf to access a copy of the administrative order against Gartmore.
Please click http://www.sec.gov/litigation/admin/2006/ia-2547.pdf to access a copy of the administrative order against Putnam Investment Management LLC.
Please click http://www.sec.gov/litigation/admin/2006/ia-2549.pdf to access a copy of the administrative order against Dreyfus.
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