SEC Overhauls Securities Offerings Rules
6.29.2005 The SEC adopted rules that modify and advance significantly the registration,
communications, and offering processes under the Securities Act of
1933. The rules are designed to eliminate unnecessary and outmoded
restrictions on offerings. In addition, the rules provide
more timely investment information to investors without mandating
inappropriate delays in the offering process. The rules also
integrate disclosure and
processes under the Securities Act and the Securities Exchange Act
of 1934. The rules accomplish these goals by addressing
communications related to registered securities offerings, delivery
of information to investors, and procedural restrictions in the
offering and capital formation process.
Please click http://www.sec.gov/news/press/2005-99.htm for the press release announcing the administrative action.
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SEC Re-Adopts Independent Chairman Rule
6.29.2005 The SEC re-adopted rules requiring investment companies to have independent chairman. The SEC rule requires 75% of the board of an investment company to be independent and the Chairman of the Board to be independent. The SEC action comes after the U.S. Court of Appeals for the District of
Columbia Circuit's decision on June 21, 2005 in Chamber of
Commerce v. SEC (69 FR 46378 (Aug. 2, 2004)). In that case, the Circuit Court remanded
the previously adopted rule back to the SEC, ordering the reulatory agency to consider:
- costs of complying with the 75%
independent director condition and the independent chairman
condition;
- an alternative to the independent
chairman condition.
Click http://www.sec.gov/rules/final.shtml to access a copy of the release.
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6.22.2005 The SEC filed an emergency
enforcement action to halt fraudulent conduct concerning
Tenet Capital Partners Convertible Opportunities Fund, LP (a hedge fund), Tenet Asset Management, LLC (the hedge fund's adviser),
and Jon E. Hankins (the principal of the adviser). The SEC alleges that the Convertible Opportunities Fund, Tenet,
and Hankins concealed, and are continuing to conceal, from investors
large investment losses and are seeking to unfairly honor a redemption
request at inflated values to cover up the fraud. In particular,
Hankins and Tenet have recently made numerous false statements to
investors of the Convertible Opportunities Fund, as well as to investors
in another hedge fund managed by Tenet and Hankins, Tenet Offshore
Capital Partners Ltd.
According to the SEC, Tenent, within the last four months, attempted to raise new capital for the Funds by meeting with investors
and making false representations concerning Tenet’s investment strategy
and the Funds’ performance. Hankins also provided investors with
deceptive and false marketing materials that, among other things,
grossly misrepresented the performance of the Convertible Opportunities
Fund during the period April through December 2004. While the marketing
materials for the Convertible Opportunities Fund reflected a gain of
more than 32% during that period, the Convertible Opportunities Fund’s
audited financial statements for that period reflect that the fund
returned a 24% loss during the period. Hankins also distributed to at
least one investor altered audited financial statements for 2004 for the
Convertible Opportunities Fund.
Please click http://www.sec.gov/litigation/litreleases/lr19283.htm to access a copy of the administrative action.
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CFTC Freezes Hedge Fund's Assets
6.21.2005 A Pennsylvania federal court froze the assets of Philadelphia Alternative Asset Management Company, LLC (PAAM), a commodity pool operator, and Paul Eustance. The CFTC alleged that PAAM and Eustance, who managed PAAM, fraudelently solicited propsective pool participants.
Specifically, PAAM and Eustace, according to the CFTC's complaint:
- issued false statements to at least one investor about the profitability of the investment pool;
- told an investor that his account had increased $1 million when in fact the pool never traded furtues or options;
- solicited another prospective investor by showing purportedly profitable trading results for the pool that were false because the pool never traded futures and options;
- posted false trading results on the PAAM website for two other pools operated by the firm.
Please click http://www.cftc.gov/opa/adv05/opawa27-05.htm to access the administrative action.
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Investment Adviser and Broker-Dealer Charged with Failing to Maintain E-mails
6.15.2005 The SEC charged Banc of America Investment
Services, Inc. (BAISI) and BACAP Distributors, LLC (BACAP) with
violating broker-dealer record-keeping requirements, and BAISI with
violating investment adviser record-keeping requirements. The SEC alleged that between January 2001 and February 2004, both firms failed to
retain required business-related e-mail communications.
Each firm violated Section 17(a) of the Exchange Act and Rule 17a-4
thereunder, and BAISI violated Section 204 of
the Advisers Act and Rule 204-2 thereunder. The firms were
censured and ordered to comply with undertakings to ensure that they are
in compliance with the pertinent record-keeping requirements. Finally,
BAISI is ordered to pay a penalty of $1,000,000 and BACAP is ordered to
pay a penalty of $500,000.
Please click http://www.sec.gov/litigation/admin/34-51852.pdf for the administrative action in pdf.
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Adviser Charged with Running Fraudelent Leveraged Investment Scheme
6.13.2005 The SEC charged Jeff Thomas Allen, who resides in Pittsburgh, Pennsylvania, orchestrated a fraudulent trading scheme between January 2002 and July
2002. Allen was the Chairman, President, Chief Investment
Officer and majority shareholder of Advanced Investment Management, Inc.
(AIM).
The SEC's complaint alleged that Allen improperly leveraged AIM advisory client assets, which resulted in more
than $415 million in client losses. The complaint further alleged that,
in an effort to conceal his fraudulent conduct, Allen purchased and then
sold the securities that created the unauthorized leverage on or near
the last day of the month to avoid the disclosure of his excessive use
of leverage in client monthly account statements. The complaint alleged
that Allen further made misstatements and omissions of material facts in
client monthly account statements when he failed to disclose his
unauthorized and improper trading scheme.
Please click http://www.sec.gov/litigation/admin/ia-2394.pdf for the administrative action in pdf.
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CFTC Chairman Speaks on Hedge Fund Regulation
6.7.2005 Sharon Brown-Hruska, Acting Chairman of the CFTC, spoke at the Managed Funds Association Annual Forum 2005 in Chicago. She noted that over the past few years, hedge funds, or in the vernacular of the futures industry, commodity pools, have generated an increasing amount of interest and fascination on the part of the investing public and regulators.
She reminded the audience that any hedge fund manager that includes investments in the markets under CFTC’s jurisdiction, even if they qualify for an exemption from registration, continue to fall under the legal definition of a CPO or CTA, meaning that certain of the CFTC’s rules and provisions of the Commodity Exchange Act—such as those proscribing fraud or manipulation –continue to apply.
Chairman Hruska has "long agreed with Federal Reserve Board Chairman Alan Greenspan that imposing a regulatory regime that would constrain risk-taking and leverage by these funds could do significant harm in that it may deprive the markets of the efficiency enhancing liquidity that funds provide." Thus, she has "repeatedly argued against additional regulation of hedge funds since I believe that the current regime in which our regulatory energies are focused on markets to ensure their efficiency and integrity has proven effective."
With respect to the proposed SEC regulation of hedge funds, Chairman Hruska stated that the CFTC formally request that the SEC provide a broad exemption for CPOs and CTAs who are already registered with the CFTC. While the SEC did not provide the requested exemption at the time, she noted that senior staff of the SEC and the CFTC have met to discuss a test that would allow those entities that are already registered with the CFTC and not “primarily engaged in” securities transactions to avoid double registration with our two agencies.
I firmly believe that CFTC registrants who sponsor, operate or advise identified commodity pools should be exempted from the SEC’s new rule.
Please click http://www.cftc.gov/opa/speeches05/opabrownhruska34.htm for a copy of the speech.
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NASD Fined 15 Broker-Dealers in Connection with the Receipt of Directed Brokerage in Exchange for Preferential Treatment for Mutual Funds
6.8.2005 The NASD imposed fines totaling more than $34 million on 15 broker-dealers in connection with the receipt of directed brokerage in exchange for preferential treatment for certain mutual fund companies.
All of the cases involved violations of NASD's Anti-Reciprocal Rule, which prohibits firms from favoring the sale of shares of particular mutual funds on the basis of brokerage commissions received by the firm. Among other things, a firm may not recommend specific funds to sales personnel or establish preferred lists of funds in exchange for directed brokerage.
The NASD found that the 14 retail firms, most of which sold funds offered by hundreds of different mutual fund complexes, operated "preferred partner" or "shelf space" programs that provided certain benefits to a relatively small number of mutual fund complexes in return for directed brokerage. The benefits to mutual fund complexes of these quid pro quo arrangements included, in various cases, higher visibility on the firms' internal websites, increased access to the firms' sales forces, participation in "top producer" or training meetings, and promotion of their funds on a broader basis than was available for other funds.
Please click http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_014340&ssSourceNodeId=5 for the administrative action.
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OCIE Director Testifies on Hill
6.7.2005 Lori A. Richards,
Director, Office of Compliance Inspections and Examinations (OCIE) testified before the U.S. House Subcommittee on Commercial and Administrative Law. She testified about about the SEC's oversight of the mutual fund industry, the recent mutual fund trading abuses and recent GAO reports concerning the SEC's examination and enforcement actions with respect to these abuses.
She reviwed OCIE's new risk-based approach, including the following enhancements to this program:
- Focused routine examinations on high-risk firms: with the additional resources added to the examination program in 2003, OCIE increased examination frequency of the largest fund firms, and those fund firms posing the greatest compliance risk (from once every five years, to once every two or three years -- prior to 1998, examination cycles had been as infrequent as once every 12-24 years). Other firms are examined "for cause," in sweeps, or randomly;
- Increased the use of technology and data;
- Implemented a new "Risk Mapping" method to identify new or emerging areas of compliance risk, and worked closely with the SEC's new Office of Risk Assessment to help identify and coordinate areas of risk across the agency;
- Implemented a new program to rapidly investigate emerging compliance problems promptly by use of "sweep examinations;"
- Increased the use of interviews during examinations, as part of the assessment of a firm's control or risk environment;
- Worked with an SEC task force to study the possible use of data as part of a surveillance program for funds and advisers;
- Initiated new dedicated "monitoring team" program for certain large advisers; and
- Initiated a new "Chief Compliance Officer Outreach" program to help new mutual fund and investment adviser chief compliance officers identify and resolve compliance problems at their firms.
She also spoke about risk-targeted sweeps. In a risk-targeted sweep, staff review a risk or potential violation across a number of different firms. In terms of methodology, this is a "horizontal" review. That is, staff look at the risk area across several firms, as compared to a "vertical" review where it would look at a single firm from top to bottom.
She additionally stated that OCIE's examination program will soon include monitoring teams for the largest mutual fund complexes. Teams of examiners will be assigned to each mutual fund group, will get to know the business and operations of the complex, and will visit it regularly.
Please click http://www.sec.gov/news/testimony/ts060705lar.htm to access the testimony.
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Adviser Charged with Misappropriating Assets
6.2.2005 The SEC filed a complaint alleging that Amerindo
Investment Advisors Inc., Alberto William Vilar and Gary Alan Tanaka,
Amerindo’s co-founders and principals, engaged in securities fraud by
misappropriating at least $5 million from an Amerindo client. Amerindo
is a registered investment adviser with offices in San Francisco, New
York and London.
The Commission’s complaint alleges that in approximately June 2002,
Vilar solicited an Amerindo client and close personal friend to invest
$5 million in a limited partnership, the Amerindo Venture Fund LP, that
was purportedly being organized to qualify and be operated as a Small
Business Investment Company (“SBIC”). Shortly after the investor wired
$5 million to a brokerage account as Amerindo had instructed, Tanaka
began to transfer a portion of her funds to other accounts Vilar and
Amerindo controlled. Specifically, within several days of her
investment, Tanaka signed letters of authorization directing the
transfer of at least $1.65 million to other accounts, including $1
million to a personal checking account held in Vilar’s name, and
$650,000 to a bank account Amerindo controlled. Vilar then used the
funds he received from the investor to pay personal expenses, including
transferring $540,000 to Washington and Jefferson College, his alma
mater to which he had pledged large sums, and $177,000 to the American
Academy in Berlin, an institution to which Vilar had donated money in
the past.
Please click http://www.sec.gov/litigation/litreleases/lr19245.htm to access the administrative action.
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CFTC Issues Backgrounder Notice on Speculative Issues
6.1.2005 The CFTC updated its "backgrounder" notice on speculative limits, hedging, and aggregation in commodity futures and options. The Backgrounder covers the current rules and policies for speculative position limits, hedging, and aggregation as they apply to commodity futures and options.
Please click http://www.cftc.gov/opa/backgrounder/opaspeclmts.htm to access the backgrounder.
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