DISTRIBUTIONS MADE BY HEARTLAND FUNDS
11.27.2001 The receiver appointed to administer several Heartland Group Funds that experienced severe losses as a results of derivative investments made cash distributions to shareholders. The distributions were made after certain portfolio securities of the funds were sold.
Please click http://www.sec.gov/litigation/litreleases/lr17247.htm to access a copy of the administrative action.
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SEC NAMES NEW DIRECTOR OF CORPORATION FINANCE
11.19.2001 The SEC announced that Alan L. Beller will become the next Director of the Division of Corporation Finance on January 14, 2002. Mr. Beller currently is a partner at the law firm Cleary, Gottlieb, Steen & Hamilton. Mr. Beller has a broad securities background, with special expertise in international securities law.
Please click http://www.sec.gov/news/headlines/newcfdirector.htm
to access a copy of the of the release announcing the appointment of Mr. Beller.
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ENFORCEMENT ACTION FILED AGAINST HEDGE FUND MANAGER
11.19.2001 Steven R. Hoover and his advisory firm Hoover Capital Management were charged with misappropriating $470,000 from the hedge fund that it advises. The SEC alleges that the hedge fund paid Mr. Hoover's personal expenses, including rent on a luxury apartment.
At the request of the SEC, a Massachusetts federal district court entered a temporary restraining order against Mr. Hoover and his firm from continuing to violate Sections 206(1) and (2) of the Investment Advisers Act of 1940, and to freeze his assets.
Please click http://www.sec.gov/litigation/litreleases/lr17240.htm to access the administrative action.
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UNREGISTERED ADVISER CHARGED WITH FRAUD
11.16.2001 A resident of Rhode Island, Alfred M. Lemcke, was charged with scheming to defraud several clients of approximately $1 million which he obtained while acting as their investment adviser between December 1995 and September 2001. The clients include a close personal friend (and best man at his wedding), the friend's sister and her then husband, the sister's three minor children, the husband's elderly parents, and even a neighbor who was helping renovate Lemcke's kitchen. Lemcke told the clients that he was going to invest their money in various stocks, mutual funds, and other investments and provided them with ficticious periodic account statements showing that their investments were generating substantial returns. Unfortunately, the returns,and the investments themselves did not exist. Lemcke has recently admitted that he diverted the clients' funds for his personal use and that most, if not all, of the money has been lost.
Mr. Lemcke was formally a registered representative with MML Investor Services, Inc. He was never registered as an investment adviser.
Please click http://www.sec.gov/litigation/complaints/complr17237.htm to access the administrative action.
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HOUSE PASSES RETIREMENT ADVICE LEGISLATION
11.15.2001 The House of Representatives passed the Retirement Security Advice Act of 2001. This legislation would provide a statutory exemption from the prohibited transactions rules of ERISA and the Internal Revenue Code to permit qualified plan service providers to offer investment advice to plan participants. Similar legislation was recently introduced in the Senate.
Please click http://edworkforce.house.gov/press/press107/invadvpass111501.htm
to access information about the House bill.
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AMENDMENTS TO MUTUAL FUND CUSTODY RULE PROPOSED
11.15.2001 The SEC has proposed amendments to Rule 17f-4 under the Investment Company Act of 1940 to update the rule that governs mutual fund assets held at securities depositories. Since the rule's adoption in 1978, there have been a number of changes in business practices that necessitate the updating of the rule. In addition, the rule has been modified to address the broader range of functions securities depositories now perform for investment companies.
Rule 17f-4 was originally adopted to address the inefficiency of transferring securities in paper certificate form. By allowing investment companies to deposit assets in a securities depository, securities can be maintained and transferred in electronic form.
Please click http://www.sec.gov/rules/proposed/ic-25266.htm to access a copy of the rule proposal.
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FLORIDA ADVISER CHARGED WITH FRAUD
11.15.2001 Stephen H. Adler of Tampa, Florida was charged by a Florida district attorney and the SEC with committing securities fraud. Mr. Adler, an investment adviser, allegedly persuaded investors to entrust him with their money, and Mr. Adler misappropriated the funds. He is alleged to have stated that he was the president of a mutual fund formerly known as the ASM Index 30 Fund and that his company was the adviser to the Fund. The investors were allegedly told that their funds would be invested in the ASM Index 30 Fund. Mr. Adler also allegedly provided the investors with fictitious statements showing the status of their investments in the Fund.
Please click http://www.sec.gov/litigation/admin/33-8034.htm to access the release announcing the administrative action.
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OFFSHORE FUND MANAGER CHARGED WITH FRAUD
11.13.2001 The SEC obtained a temporary restraining order from a New York federal district court against Peter W. Chabot that prohibits him from engaging in the fraudulent offer and sale of securities. Mr. Chabot allegedly fraudulently raised $1.2 million for investment in offshore hedge funds and made fictitious account statements. He allegedly held himself out to be an experienced trader that had developed a mathematical formula that predicts when to purchase and sell securities, and whether to take long and short positions. The 26-year old allegedly used the funds to buy personal items and to take trips to various countries.
Please click http://www.sec.gov/litigation/litreleases/lr17227.htm to access a copy of the administrative action.
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SEC OBTAINS $20 MILLION JUDGMENT AGAINST FORMER HEDGE FUND MANAGER
11.13.2001 A New York federal district court entered a $20 million judgment against Michael Berger, the former manager of Manhattan Investment Fund, Ltd. The judgment amount represents management and incentive fees that Mr. Berger's investment advisory firm earned from the hedge fund, as well as prejudgment interest. The SEC had previously charged Berger, his firm and the fund with massive fraud. The fund, a British Virgin Islands entity, sold interests to foreign investors and U.S. tax-exempt investors. It was alleged that investors in the fund lost in the aggregate over $400 million. The advisory firm and the hedge fund currently are in bankruptcy proceedings. Mr. Berger is also the subject of a criminal investigation.
To access a copy of the administrative action, please click http://www.sec.gov/litigation/litreleases/lr17230.htm.
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CHAIRMAN PITT REVIEWS SEC'S PROPOSED AGENDA
11.8.2001 In a speech at the Securities Industry Association's annual meeting, Chairman Harvey Pitt outlined the SEC's proposed regulatory agenda. After briefly reviewing the securities industry's response to the events of September 11, 2001, Pitt urged securities firms to increase their backup capabilities, maintain duplicate business records at different locations, and to make sure their communication systems can function in emergency situations. Chairman Pitt stated his belief that the SEC should limit its role in shaping the securities markets. He vowed to speed up the process of obtaining SEC approval for innovative products and ideas. He also wants to increase the number of economists at the SEC.
Please click http://www.sec.gov/news/speech/spch521.htm to access a copy of Mr. Pitt's speech at the SIA meeting.
In a speech at the Public Law Institute's 33rd Annual Institute on Securities Regulation conference, he emphasized that the government is a service industry. He stated that the industry should have adequate input in the SEC's initiatives. In reviewing issues, the SEC will determine how investors are affected and whether the U.S. companies will be strengthened by the proposed course of action.
He promised that the SEC would try to achieve "real-time" enforcement. He wants investors to be compensated as soon as possible, and the SEC will give some form of "credit" to companies that inform the SEC about their violations. He also will try to reduce the number of repeat offenders.
Chairman Pitt also called for improvement in the disclosure and capital raising mechanisms. This means using technology to simplify disclosure documents, requiring disclosure of events in the interim between periodic reports, and making financial information comprehensible to the average investor. The SEC will create a new position entitled "Chief Technology Officer."
Please click http://www.sec.gov/news/speech/spch520.htm to access a copy of Mr. Pitt's speech at the PLI conference.
Also, please click http://www.sec.gov/news/speech.shtml to access other speeches given by Chairman Pitt in November.
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PROPOSED SEC RULE WOULD SPEED UP FUND MERGERS
11.8.2001 The SEC proposed amendments to Rule 17a-8 under the Investment Company Act of 1940 that would speed up mergers of affiliated mutual funds. Mutual funds that are affiliated with each other may currently rely upon Rule 17a-8, provided the affiliation arises because they have a common adviser, common directors, and/or common officers. Certain mutual funds desiring to merge with one another are affiliated for other reasons (e.g., the adviser owns 5% or more of the shares of each fund) and currently must obtain an SEC exemptive order to merge since they are unable to rely on Rule 17a-8. Exemptive orders can take up to 6 to 9 months. If the rule amendments are adopted, the affiliated funds could merge more quickly by relying on Rule 17a-8, provided they complied with certain conditions in the rule. The conditions include obtaining shareholder vote for the merger and the independent directors making certain findings.
Please click http://www.sec.gov/rules/proposed/ic-25259.htm to access a copy the release proposing amendments to Rule 17a-8.
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ACTIVELY MANAGED EXCHANGE TRADED FUNDS CONCEPT RELEASE ISSUED
11.8.2001 The SEC issued a concept release that sought public input on issues related to actively managed exchange traded funds (ETFs). ETFs are funds that trade throughout the day. Actively managed ETFs are a hybrid of mutual funds and indexed ETFs. Currently, ETFs only track indexes and are passively managed (i.e., indexed ETFs). The release compares and contrasts actively managed ETFs with index-based ETFs. It also discusses how ETFs operate and how they may benefit investors. Some of the issues raised by the release include:
- What level of transparency in portfolio holdings is necessary to allow for effective arbitrage activity in the shares of an actively managed ETF; i.e., how often will actively managed ETFs disclose their holdings?
- Does trading in ETFs have any relation to market volatility and, if so, in what ways?
- Would actively managed ETFs present any issues with respect to these exemptions that do not exist with respect to index-based ETFs?
Please click http://www.sec.gov/rules/concept/ic-25258.htm to access a copy of the concept release.
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ADVISER CHARGED WITH DISTRIBUTING MISLEADING FORM ADV
11.7.2001 The SEC made a finding that the Form ADV of IMS/CPAs & Associates (IMS), a registered adviser, contained material misrepresentations and omissions. In addition, the engagement letters and certain disclosure documents used by IMS contained misrepresentations. For example, IMS failed to disclose the existence of a financial interest or economic benefit in certain recommendations they made to their clients. Specifically, IMS received compensation from another investment adviser when IMS clients invested in mutual funds advised by the other adviser.
The SEC suspended the registration of IMS for six months and suspended the control persons from being associated with an investment adviser for six months. IMS was also fined.
Please click http://www.sec.gov/litigation/opinions/33-8031.htm to access a copy of the administrative action.
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AFTER TAX FAQ ISSUED
11.2.2001 The SEC's Division of Investment Management issued a frequently ask questions (FAQ) release about the mutual fund after-tax rules and form amendments that were adopted by the SEC on January 28, 2001. The amendments will require mutual funds to disclose in their prospectus after-tax returns based on standardized formulas. The release answers a number of questions. For example, after-tax returns should generally be calculated using the highest rate applicable to any federal income tax bracket.
A mutual fund is not required to include the new after-tax return disclosure in its prospectus until it files its first annual update on or after February 15, 2002. If a mutual fund's advertisements and sales materials are used on or after December 1, 2001, they must include after-tax returns and the fund must update its prospectus at that time.
Please click http://www.sec.gov/divisions/investment/guidance/mutualq-a.htm to access a copy of the FAQ.
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