SEC Expands Interactive Data Program to Include Mutual Funds
1.31.2007 The SEC voted to publish for comment rule amendments that would expand the agency's interactive data voluntary program to enable mutual funds to submit data tagged risk/return summary information.
The risk/return summary at the front of every mutual fund prospectus includes information about a fund's investment objectives and strategies, risks, costs, and historical performance.
The submission of tagged risk/return summary information would be supplemental and would not replace the required official versions of the information. Any mutual fund submitting tagged risk/return summary information would be required to include this information as an amendment to a filing on Form N-1A, the registration form for mutual funds.
The proposed rule amendments would permit mutual funds to submit tagged risk/return summary information using a taxonomy being developed by the Investment Company Institute (ICI). See related story.
Data tagging uses standard definitions (or data tags) to translate text-based information into data that is interactive, that is, data that can be retrieved, searched, and analyzed through automated means. Tags are standardized through the development of taxonomies, which are essentially data dictionaries that describe individual items of information and mathematical and definitional relationships among the items. Tagged information can help investors, analysts, and other users to mine the wealth of information contained in detailed paper disclosure documents, providing users with the ability to access precisely the information in which they are interested and to analyze that data.
Please click http://www.sec.gov/news/press/2007/2007-12.htm to access the press release announcing the proposal.
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SEC Commissioner Atkins Speaks on Hedge Funds
1.29.2007 SEC Commissioner Atkins spoke at the 9th Annual Alternative Investment Roundup in Scottsdale, Arizona on hedge funds and other alternative investments. He reviewed the SEC's recent history of hedge fund regulation initiatives, including the SEC's ill-fated attempt to require advisers to hedge funds to register with the SEC. According to Commissioner Atkins, the SEC learned the following lessons from that experience:
- The SEC should thoroughly consider why it needs to regulate, before regulating.
- The SEC should consider whether a proposed regulatory approach will work to meet that need.
- The SEC should consider whether the benefits of a particular regulatory approach outweigh the costs.
- The SEC should consider whether the proposed regulatory approach is within its regulatory authority.
- The SEC needs to work better with other regulators.
He further stated that one irony of the SEC's complaints about the secretive nature of the hedge fund industry is that advertising restrictions on hedge funds have been interpreted broadly so that hedge fund advisors do not dare to say anything publicly. In his view, the SEC should consider undertaking the long-overdue task of revising Form D and, as part of that revision, refine the form so that it solicits census information on offerings of private investment funds.
Finally, he reviewed the SEC's recently proposed hedge fund rules, which would do two things:
- they would clarify the SEC's authority to bring enforcement actions against investment advisors for fraud against investors and prospective investors in their funds (as opposed to fraud against the funds themselves); and
- they would significantly narrow the pool of investors eligible to invest in hedge funds and private equity funds by creating a new category of accredited investor for private investment pools. It would include anyone who satisfies the existing $1,000,000 net worth or the $200,000 net income test and owns at least $2.5 million in investments (which would exclude the person's home).
The new investment minimum would be adjusted for inflation every five years. Essentially, then, the proposed rule would layer an additional requirement on top of the existing accredited investor requirements for Section (3)(c)(1) funds. Section (3)(c)(7) funds would not be affected since investors in those funds already are similarly subject to a two-part test.
Please click http://www.sec.gov/news/speech/2007/spch012907psa.htm to access a copy of the speech.
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Banc of America Investment Services, Inc. Subject to AML Fine
1.28.2007 The NASD fined Banc of America Investment Services, Inc. (BAI) $3 million in connection with the firm's failure to obtain customer information for certain high-risk accounts. In addition, the NASD found that BAI had inadequate communication with its parent bank to ensure that BAI's independent suspicious activity report (SAR) filing obligations were met.
According to the NASD, BAI failed to obtain required additional customer information for high risk accounts. The 34 accounts at issue involved trust and private investment corporations domiciled in the Isle of Man and apparently affiliated with one family. The offshore entities located in the Isle of Man collectively held from $79 million to $93 million in assets and engaged in multi-million-dollar wire transfers across international boundaries. At the time the accounts were opened in August 2003, BAI had established anti-money laundering procedures designed to address certain customer account risks by requiring additional information from the accountholders, specifically, the names of the beneficial owners, before conducting substantial transactions in the accounts.
The NASD also found that from August 2003 to October 22, 2004, BAI did not require the names of the beneficial owners and never restricted the activities in the accounts. BAI allowed the accounts to engage in large wire transactions, even though BAI did not have beneficial ownership information for them. In addition, throughout this time period, BAI continued to allow significant transactions to occur in the accounts despite the advice from a senior lawyer at BAI in March 2004 that BAI should obtain the names of the beneficial owners, and a determination by the BAI risk committee in May 2004 that the information must be obtained.
Despite repeated and ongoing requests by its clearing firm, BAI failed to obtain the names of the beneficial owners, and to provide them to its clearing firm. Over a 10-month period, BAI received from its clearing firm numerous requests for ownership information and notices pointing out circumstances that could signal money-laundering activity. Some at BAI expressed concerns that insisting upon the beneficial ownership information might cause the account holders to move the accounts to another institution. But without the names of the beneficial owners, BAI could not reasonably evaluate whether activity in the accounts, which had been brought to BAI's attention by its clearing firm, was suspicious and reportable.
Finally, the NASD found that BAI had an inadequate compliance program for reporting suspicious transactions. BAI relied on its parent, a bank with its own independent reporting obligations, to determine whether a suspicious activity report (SAR) should be filed.
Please click http://www.nasd.com/PressRoom/NewsReleases/2007NewsReleases/NASDW_018404 to access a copy of the press release announcing the administrative action.
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Mutual Fund Wrap Fee Program Sponsor Charged with Overcharging Investors
1.25.2007 The SEC brought charges against Vertical Capital Partners, Inc., formerly
known as Security Capital Trading, Inc., and now known as Arjent Ltd.
(Vertical), and Francesca Wolfsohn in connection with a mutual fund wrap fee program Vertical sponsored.
According to the SEC, Vertical, a registered broker-dealer, sponsored a wrap fee program from 1999 and at least through the end of 2005 that consisted of managed accounts traded by Wolfsohn, a registered
representative at Vertical. Account agreements for the managed
accounts provided that Vertical would not charge loads or sales
commissions on mutual fund purchases. Contrary to these provisions,
and without disclosure to clients, between August 2002 and August
2004, Vertical charged managed account clients approximately $530,000
in loads on mutual fund purchases. The overcharge was apparently the
result of an error in Vertical's computerized trade entry process.
The SEC stated that Vertical received, but failed to adequately review
or investigate, monthly reports on Wolfsohn's compensation that should
have alerted them to the improper charges. As a result, Vertical
violated Section 206(2) of the Investment Advisers Act of 1940 and Rule 10b-10
under the Securities Exchange Act of 1934, and Wolfsohn caused
Vertical's violations of these provisions.
Please click http://www.sec.gov/litigation/admin/2007/34-55177.pdf to access a copy of the administrative action.
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SEC Adopts Proxy Rule Amendments Requiring Internet Posting of Proxy Materials
1.22.2007 The SEC adopted amendments to the proxy rules under the Securities Exchange Act of 1934 that provide an alternative method for issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet Web site and providing shareholders with notice of the availability of the proxy materials. Issuers must make copies of the proxy materials available to shareholders on request, at no charge to shareholders.
Under the new rules, an issuer may satisfy its obligation under the SEC’s proxy rules to furnish proxy materials to shareholders in connection with a proxy solicitation by posting its proxy materials on a publicly-accessible Internet Web site (other than the SEC’s EDGAR Web site) and sending a Notice of Internet Availability of Proxy Materials (“Notice”) to shareholders at least 40 calendar days before the shareholder meeting date indicating that the proxy materials are available and explaining how to access those materials.
Shareholders must have a means to execute a proxy as of the time on which the Notice is sent. The Notice also must explain how a shareholder can request a copy of the proxy materials and how a shareholder can indicate a preference to receive a paper or e-mail copy of any proxy materials distributed under the notice and access model in the future. An issuer may not send a proxy card along with the Notice; however, 10 calendar days or more after sending the Notice, the issuer may send a proxy card to shareholders. If an issuer chooses to send a proxy card without a copy of the proxy statement under this provision, a copy of the Notice must accompany the proxy card so that recipients will be notified again about the Web site on which the proxy statement is accessible. Finally, the notice and access model may not be used in conjunction with a proxy solicitation related to a business combination transaction.
Shareholders and other persons conducting their own proxy solicitations may rely on the notice and access model under requirements substantially similar to the requirements that would apply to issuers. However, unlike the requirements for an issuer, a soliciting person other than the issuer may selectively choose the shareholders from whom it desires to solicit proxies without the need to send an information statement to all other shareholders.
The SEC stated that no issuer may send a Notice to shareholders before July 1, 2007. It noted that issuers and intermediaries typically hire third parties to handle the logistics of proxy distribution. These companies will require time to adjust their systems to accommodate the notice and access model. Therefore, an issuer may not use the new model for meetings before August 10, 2007 because of the 40-day deadline. Similarly, if an issuer’s meeting will be on or after August 10, 2007, it may only send the Notice on or after July 1, 2007, even if the issuer wishes to send the Notice more than 40 days prior to the meeting date
Please click http://www.sec.gov/rules/final/2007/34-55146.pdf to access a copy of release adopting the amendments to the proxy rules.
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Hedge Fund Adviser Charged with Market Timing Involving Variable Annuity Contracts
1.18.2007 The SEC charged John M. Fife
(Fife) and Clarion Management, LLC (Clarion Management) with engaging in
a fraudulent scheme to purchase variable annuity contracts issued by
the Lincoln National Life Insurance Company (Lincoln) for Clarion
Capital, LP (Clarion Capital) in order to engage in market timing.
Clarion Capital was a Chicago hedge fund formed to market time
international mutual funds available through variable annuities.
According to the complaint, at all relevant times, Fife controlled
Clarion Capital and carried out the scheme through Clarion Management,
the hedge fund's general partner and unregistered investment adviser.
The complaint alleges that Fife and Clarion Management used deceptive
tactics to purchase contracts and engage in market timing for the
benefit of Clarion Capital. These tactics included using trusts and
limited liability companies as nominee contract owners and
beneficiaries to conceal Clarion Capital's financial interest in the
variable annuity contracts. After the purchase of each contract, Fife
and Clarion Management engaged in market timing until their activity
was detected and restricted by Lincoln. The complaint also alleges
that when Lincoln imposed certain trading restrictions, Fife and
Clarion Management caused the trusts to surrender the contracts, and
then used deceptive means to disguise the purchase of more variable
annuity contracts, including using previously unused trusts and
limited liability companies. Through this deception, the complaint
alleges that Fife and Clarion Management made hundreds of thousands of
dollars in profits for themselves at the expense of the other
shareholders in the mutual funds.
Please click http://www.sec.gov/litigation/complaints/2007/comp19972.pdf to access a copy of the complaint.
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Fred Alger Settles Market Timing Charges
1.18.2007 Fred Alger Management, Inc. (“Alger Management”) and Fred Alger & Company, Incorporated (“Alger Inc.”) (collectively "Alger”) settled market timing and late trading charges brought by the SEC involving mutual funds in the Alger Fund Group (“Alger Funds”).
Alger Management, the investment adviser to the Alger Funds, and Alger Inc., a broker-dealer that serves as the principal underwriter and distributor of Alger Funds, permitted numerous select investors to market time the Alger Funds. This timing activity contradicted representations in the Alger Funds' prospectus that limited shareholders to six exchanges a year. Additionally, Alger Management failed to disclose that Alger Inc. had entered into numerous arrangements with select investors, including “sticky asset” arrangements, to permit them to time the Alger Funds. More specifically, from at least 2000 through late 2002, Alger Inc. permitted select investors to time the Alger Fund. Over time, Alger Inc. also began to demand that market timers place “static” or “buy and hold” investments in certain portfolios within the Alger Funds in exchange for timing capacity (these arrangements are sometimes referred to as “sticky asset” arrangements).
According to the SEC, the market timing in the Alger Funds diluted the value of long-term shareholders’ investments. At the same time, Alger Inc. and Alger Management benefited through advisory fees paid to Alger Management and distribution and servicing fees paid to Alger Inc.
Please click http://www.sec.gov/litigation/admin/2007/34-55118.pdff to access a copy of the administrative order.
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SEC Brings Disclosure of Advisory Fee Case Against Mutual Fund Adviser
1.18.2007 The SEC charged Kelmoore Investment Company, Inc. (Kelmoore), an investment adviser located in Palo Alto, California with inadequate disclosure of its advisory fee to shareholders of mutual funds (Kelmoore Funds) that it advises. The
SEC stated that Kelmoore purported to
charge investors a 1% advisory fee. However, if Kelmoore had
adequately disclosed all its advisory charges, the fees would have
ranged from 1.5% to over 3%. Without admitting or denying the
SEC's findings, Kelmoore agreed to pay a $100,000 penalty and
to undertake certain compliance reforms.
The SEC found that from 1999 to 2005, Kelmoore acted as both
investment adviser and securities broker for five mutual funds.
Kelmoore's fund prospectuses and related documents informed investors
that it charged an advisory fee totaling 1% of assets under
management. According to the SEC, these documents suggested that all
of the significant advisory services performed by Kelmoore were
covered by the 1% fee. However, the SEC found that
Kelmoore failed to inform investors that the firm internally
categorized most services it was providing as brokerage, rather than
advisory, and was charging investors substantial brokerage commissions
on top of the 1% fee. According to the SEC, had Kelmoore actually
calculated the fee in the manner suggested by its written disclosures,
the fee would have been as high as 3.63%. As a result of the alleged
misleading disclosures, the SEC finds, it would have been
difficult for investors to understand the actual amount they were
paying for advisory services or make an informed investment decision
when comparing the Kelmoore Funds to other mutual funds.
Please click http://www.sec.gov/litigation/admin/2007/33-8774.pdf to access a copy of the administrative order.
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SEC and Other Regulatory Agencies Issue Statement on Complex Structured Finance Activities
1.18.2007 The SEC, along with five other federal agencies, have jointly issued a final statement on the complex structured finance transactions ("CSFTs") of financial institutions. The statement describes the types of internal controls and risk management procedures that are designed to help financial institutions identify, manage, and address the heightened legal and reputation risks that may arise from certain CSFTs.
Besides the SEC, the final statement was issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. The final statement takes a risk- and principles-based approach to addressing the risks CSFTs may pose to institutions and focuses on those CSFTs that may present elevated levels of legal or reputational risk to institutions.
Please click http://www.sec.gov/rules/policy/2007/34-55043.pdf to access a copy of the final statement.
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Former Head of Putnam Funds Is the Subject of Administrative Order
1.8.2007 The SEC found that Lawrence J. Lasser (Lasser), who was the Chief Executive Officer of Putnam LLC and President
of the investment adviser to the Putnam Funds, Putnam Investment
Management, LLC (Putnam), did not ensure that Putnam fulfilled its
fiduciary duty to disclose adequately to the Putnam Funds' Board of
Trustees the use of fund brokerage commissions to pay for "shelf
space" arrangements or potential conflicts of interest created by this
use.
The SEC specifically found that from at least January 1, 2000 through November 1,
2003, Putnam directed brokerage commissions on the Putnam Funds'
portfolio transactions to broker-dealers for "shelf space" or
heightened visibility within their distribution systems. The Putnam
Funds' distributor, Putnam Retail Management Limited Partnership
(PRM), had entered into arrangements with over 80 broker-dealers
whereby the broker-dealers provided services designed to promote the
sale of the Putnam Funds. Approximately 20 of those broker-dealers
were paid in cash while over 60 of them received brokerage commissions
from the Putnam Funds' portfolio transactions. When Putnam directed
fund brokerage commissions to broker-dealers in connection with these
arrangements, its affiliate, PRM, did not use its own assets to pay
for these obligations. Because PRM and Putnam were under common
control, the entire Putnam organization benefited from the use of fund
assets to defray such expenses. However, Putnam did not adequately
disclose this conflict of interest to the Putnam Board. Putnam also
did not adequately disclose to the Putnam Board the potential conflict
of interest presented for its Equity Trading group, which was faced
with directing trades to the broker-dealers designated by PRM for
these arrangements, while at the same time satisfying its best
execution obligations.
Please click http://www.sec.gov/litigation/admin/2007/ia-2578.pdf to access the administrative order.
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Hedge Fund Portfolio Manager Charged with Engaging in Illegal "Pipe" Trading Scheme
1.7.2007 The SEC brought securities fraud and related charges against Joseph J. Spiegel, a former portfolio manager for Spinner
Global Technology Fund, Ltd. (SGTF), a New York-based hedge fund, in
the U.S. District Court for the District of Columbia. Spiegel, without
admitting or denying the allegations in the SEC's complaint,
agreed to settle charges that he engaged in an unlawful trading scheme
on SGTF's behalf in violation of the antifraud and registration
provisions of the federal securities laws in connection with three
"PIPE" (Private Investment in Public Equity) offerings.
According to the SEC:
- Spiegel, after agreeing to invest in three PIPE transactions,
sold short the issuer's stock through "naked" short sales in
Canada.
- Once the SEC declared the resale registration statement
effective, Spiegel used SGTF's PIPE shares to close out some or
all of the pre-effective date short positions, a practice Spiegel
knew, or was reckless in not knowing, was prohibited by the
registration provisions of the Securities Act of 1933. To avoid
detection and regulatory scrutiny, Spiegel employed wash sales
and matched orders to make it appear that he was covering SGTF's
pre-effective date short positions with open market stock
purchases when, in fact, the covering transactions were not done
with open market shares because the hedge fund was on both sides
of the trades and covered the short positions with its PIPE
shares. Spiegel's illegal trading resulted in ill-gotten gains
for SGTF.
- In each of the transactions, Spiegel, on behalf of SGTF, also
made materially false representations to the PIPE issuers to
induce them to sell securities to SGTF. As a precondition of
participation in a PIPE, SGTF had to represent that it would not
sell, transfer or dispose of the PIPE shares other than in
compliance with the registration provisions of the Securities
Act. This representation was material to the PIPE issuers, who,
as the securities purchase agreements made clear, relied on the
investors' representations in order to qualify for an exemption
from the registration requirements for their private offering.
However, at the time Spiegel signed the securities purchase
agreements on behalf of the hedge fund, he intended to distribute
the restricted PIPE securities in violation of the registration
provisions of the Securities Act.
Please click http://www.sec.gov/litigation/litreleases/2007/lr19956.htm to access a copy of the administrative order.
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CFTC Now Requires CPO and CTA Filings to be Made Electronically
1.5.2007 The CFTC announced that it requires the electronic filing of notices of exemption and exclusion for commodity pool operators (CPOs) and commodity trading advisors (CTAs).
Generally, a
person who operates a commodity pool
must register with the CFTC as a
CPO, and a person who manages
clients’ trading must register with the
CFTC as a CTA. Under
CFTC Regulation 4.5, certain
‘‘otherwise regulated persons’’ are
excluded from the CPO definition.
These persons include registered
investment companies, banks and trust
companies, insurance companies, and
fiduciaries of ERISA pension plans. A
person who qualifies for the exclusion
must file a notice of eligibility with
National Futures Association ("NFA").
CFTC regulations also make
certain exemptions from CPO and CTA
registration available to persons who
meet specified criteria. Regulation 4.13
permits exemption from registration for
CPOs that limit their activities to small
or family pools; or whose participants
are highly sophisticated; or whose pools
limit participants to SEC "accredited
investors".
Firms that are registered with the
CFTC in any capacity and nonregistrants
will both access NFA’s
electronic filing system through the use
of a designated user ID and password.
Registered firms will establish access for
appropriate staff using the security
manager process in place for their
existing Online Registration System
(‘‘ORS’’) accounts, the process that is
currently used for registration and other
electronic filings with NFA.
In order to enable non-registrants, who are not
required to have ORS accounts, to file
exemption notices, NFA has established
a new process that contains similar
safeguards regarding the identity of the
filers and provides the non-registrant
with the ability to establish one or more
system users. The electronic filing system will
allow filers to select the applicable
exemption type and complete a form
that will provide the information
required for the exemption filing.
The effective date is February 15, 2007.
Please click http://www.cftc.gov/files/foia/fedreg07/foi070116a.pdf to access a copy of the release adopting the rule.
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ICI Releases Mutual Fund Interactive Data Taxonomy
1.4.2007 The Investment Company Institute (ICI) released its draft taxonomy for eXtensible Business Reporting Language (XBRL) data tagging by the mutual fund industry. The ICI stated that the development of this data tagging language for the risk/return summary is an important first step for helping capture the power of the Internet to provide more accessible and better information to fund investors. It further stated that its research indicates that recent fund buyers look primarily for information included in the risk/return summary before making a mutual fund purchase. XBRL tagging holds the potential to make risk/return summary data interactive by enabling investors or their advisers to easily search for, retrieve, and compare information on hundreds of mutual funds across multiple fund complexes.
The ICI developed an XBRL taxonomy that can be used to "tag" data in the risk/return summary that is included in the front of every mutual fund prospectus. The risk/return summary includes the information of most importance to investors - the fund's investment objectives, principal investment strategies, principal risks, and historical fund performance, along with the standardized fund fee table.
The ICI posted the draft taxonomy to its website for a 45-day public review period. The taxonomy, supporting materials, and instructions for reviewing and commenting on the draft can be found at
http://members.ici.org/xbrl
Please click http://www.ici.org/new/07_news_xbrl_txnmy.html#TopOfPage to access a copy of the press release issued by the ICI on its XBRL initiative.
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