Newly Registered Advisers to Receive "Welcome Letter" from the SEC
7.24.2007 The SEC will send all newly registered advisers a "welcome letter," along with a plain English summary of the key provisions of the Advisers Act, to help them understand their compliance responsibilities. The SEC stated that its goal is to help educate newly registered advisers about their compliance obligations that promote investor protection. The welcome letter will:
- introduce the adviser to the local office of the SEC;
- provide information about the resources available on the SEC's Web site; and
- provide information about the SEC's CCOutreach Program to help chief compliance officers implement effective compliance programs.
Please click http://www.sec.gov/news/press/2007/2007-140.htm to access the press release announcing the welcome letter.
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No-Action Letter on 3(c)(7) Exemption Issued to Trustee of Family Trust
7.24.2007 The SEC issued a no-action letter under Section 3(c)(7) of the Investment Company Act of 1940 allowing the trustee (the "Trustee") of several large family trusts (the "Trusts"), who is a qualified purchaser under Section 2(a)(51)(A)(iv) of the 1940 Act, and the spouse of the Trustee (the "Spouse"), who is not a qualified purchaser, to invest jointly in Section 3(c)(7) Funds.
Section 3(c)(7) of the 1940 Act excludes an issuer from the definition of investment company provided, in pertinent part, that the outstanding securities of the issuer are owned exclusively by persons who, at the time of acquisition of the securities, were "qualified purchasers." As relevant here, Section 2(a)(51)(A)(iv) of the 1940 Act defines qualified purchaser to include: "any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments."
The incoming letter successfully argued that the Trustee is a qualified purchaser because the Trustee invests on a discretionary basis not less than $25 million in qualifying investments held in the Trusts. The Trustee has management authority over all of the Trusts. The Trustee is the sole, mandatory income beneficiary of the Trusts and a discretionary principal beneficiary of certain of the Trusts. The Trusts collectively have investments substantially in excess of $100 million. In conjunction with investments in the Trusts and otherwise, the Trustee and the Spouse periodically are offered the opportunity to invest in Section 3(c)(7) Funds.
The SEC stated as with Section 2(a)(51)(A)(i) and Rule 3c-5, Section 2(a)(51)(A)(iv) pertains to persons who have the financial sophistication to understand and evaluate the risks associated with purchasing securities of an investment pool that is not regulated under the 1940 Act. The SEC stated that it believes that it is consistent with the intent of Congress to apply the spousal joint interest position in Section 2(a)(51)(A)(i) to Section 2(a)(51)(A)(iv).
Please click http://www.sec.gov/divisions/investment/noaction/2007/mcdermott072607-3c7.htm to access a copy of the no-action letter.
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SEC Grants No-Action Letter on the Rule 3a-8 Exemption from 1940 Act Registration
7.24.2007 Section 3(a)(1) of the 1940 Act includes two definitions of "investment company" that may be relevant to R&D companies. Section 3(a)(1)(A) defines an investment company as any issuer that is, holds itself out as, or proposes to be engaged primarily in the business of investing, reinvesting, or trading in securities. Section 3(a)(1)(C) defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of Government securities and cash items) on an unconsolidated basis.
Certain R&D companies can avoid meeting the definition of investment company in Sections 3(a)(1)(A) and 3(a)(1)(C) of the 1940 Act by relying on the nonexclusive safe harbor that is provided by Rule 3a-8 under the 1940 Act. Specifically, the rule provides that an R&D company would not be an investment company under Sections 3(a)(1)(A) and 3(a)(1)(C) of the 1940 Act if the R&D company complies with certain conditions that are designed to demonstrate that it is engaged in a non-investment company business. As relevant in the no-action letter, paragraph (a)(1) of Rule 3a-8 provides that an R&D company that relies on the rule must have research and development expenses, for the last four fiscal quarters combined, that comprise a substantial percentage of its total expenses for the same period. Paragraph (b)(9) of the rule defines the term "research and development expenses" to mean "research and development expenses as defined in FASB Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs, as currently in effect or as it may be subsequently revised." The term "substantial," however, is not defined in the rule.
The SEC took the position that an R&D company complies with Rule 3a-8(a)(1) if it has an R&D Expense Ratio of at least 20%, and complies with all other requirements of Rule 3a-8.
Please click http://www.sec.gov/divisions/investment/noaction/2007/cgk071207-3a-8.htm to access a copy of the no-action letter.
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PCAOB Proposes New Auditor Ethics and Independence Rule
7.24.2007 The Public Company Accounting Oversight Board ("PCAOB") proposed a new ethics and independence Rule 3526, Communication with Audit Committees Concerning Independence, that would supersede the Board's interim independence requirement, Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and two related interpretations. The proposed rule would require a registered public accounting firm to communicate to an issuer's audit committee about any relationships between the firm and the issuer that may reasonably be thought to bear on the firm's independence. The communications would be required both before the firm accepts a new engagement pursuant to the standards of the PCAOB and annually for continuing engagements.
In addition, the Board proposed an amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, that would exclude from the scope of the rule the portion of the audit period that precedes the beginning of the professional engagement period. The proposal follows the Board's April 3, 2007 concept release, which solicited comment about the possible effects on a firm's independence of providing tax services to a person covered by Rule 3523 during the portion of the audit period that precedes the beginning of the professional engagement period, and other practical consequences of applying the restrictions imposed by Rule 3523 to that portion of the audit period.
Please click http://www.pcaob.org/News_and_Events/News/2007/07-24.aspx to access a copy of the release.
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ICI Submits Comment Letter on Proposed Revisions to Rule 12b-1
7.19.2007 The Investment Company Institute ("ICI") submitted a comment letter to the SEC recommending changes to 12b-1 regulations. In general, the ICI recommended that the SEC retain the Rule's basic framework, calling it integral to the structure of the mutual fund industry and to the delivery of advice and other services that fund investors consider absolutely essential. The trade group for the industry recommended improved disclosure to give shareholders a better understanding of the nature of the fee and clarification of the responsibilities of mutual fund boards in approving and overseeing 12b-1 plans.
The ICI urged the SEC to consider improving both the disclosure provided by mutual funds in the prospectus and other documents, and by intermediaries at the point of sale. It suggested that 12b-1 fees be identified in a manner that describes their purpose rather than being identified by reference to an SEC rule. The ICI further stated that any point-of-sale disclosure requirements should not create competitive disadvantages by imposing regulatory obligations only relating to mutual funds.
With respect to the current Rule 12b-1 responsibilities of boards of mutual funds, the ICI recommended updating or eliminating of the original nine factors devised to help boards evaluate 12b-1 fees, and/or eliminate the quarterly board reporting requirements.
The ICI strongly objected to suggestions made at the June 2007 SEC Roundtable on 12b-1 Plans that called for the fee to be "externalized" and thus more transparent, i.e., assessing it at the individual account level rather than deducting it from fund assets. The ICI believes that externalization would increase investors' tax costs, reduce the tax efficiency of funds, and require extensive overhaul of fund operating and recordkeeping systems.
Please click
http://www.ici.org/new/07_sec_12b-1_com.html#TopOfPage to access a copy of the comment letter.
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SEC Delays Implementation of AML Web Tool
7.12.2007 On June 25, 2007, the SEC announced that it had added to its Web site a software tool that permits investors to obtain information about a company's business interests in countries the U.S. Secretary of State has designated "State Sponsors of Terrorism." This information comes directly from company disclosure documents.
The SEC stated that since the software has been launched, it has received many positive comments about the usefulness of this web tool in finding disclosures about company activities in countries that sponsor terrorism, a mission that the Congress has encouraged the agency to fulfill. At the same time, the SEC has received many other negative comments, primarily from the registrants whose disclosures were accessed using the web tool. Others also complained about a lack of updated information beyond what a company has included in its most recent annual report.
To address these and related concerns, the SEC is temporarily suspending the availability of the web tool while it undergoes reconstruction. The SEC stated that it will work to improve the web tool so that it meets the various concerns that have been expressed.
The SEC will also consider whether to recommend a Concept Release on the question of how best to make public company disclosure of activities in terrorist states more accessible. The release would solicit public comment in a formal way, so that the SEC could ensure that all concerns can be met while providing better access to company disclosures on these topics.
Please click http://www.sec.gov/news/digest/2007/dig072307.htm to access the release announcing the action.
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New SRO Changes Its Proposed Name
7.12.2007 NASD and New York Stock Exchange Regulation will merge into a single self-regulatory organization ("SRO"). Initially, the new SRO would have been called the Securities Industry Regulatory Authority or SIRA. Because "SIRA" sounded similar to an Arabic word that refers to the biographies of the Prophet Muhammad, the new SRO changed its name to the Financial Industry Regulatory Authority or FINRA.
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SEC Extends Interactive Data and XBRL Program
7.11.2007 The SEC has posted a final rule release entitled "Extension of Interactive Data Voluntary Reporting Program on the EDGAR System to Include Mutual Fund Risk/Return Summary Information." The final rule extends the current interactive data voluntary reporting program to enable mutual funds voluntarily to submit supplemental tagged information contained in the risk/return summary section of their prospectuses. 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. A mutual fund choosing to tag its risk/return summary information also would continue to file this information in HTML or ASCII format, as currently required.
The SEC noted that there has been substantial progress in developing data tagging taxonomies related to a language for the electronic communication of business and financial data known as eXtensible Business Reporting Language ("XBRL"). XBRL was developed as an open source specification that describes a standard format for tagging financial and other information to facilitate the preparation, publication, and analysis of that information by software applications.
As part of the SEC's ongoing effort to evaluate the usefulness of data tagging, the SEC is adopting amendments to extend the voluntary program to enable mutual funds to submit exhibits containing tagged risk/return summary information attached to EDGAR filings. Any mutual fund may participate, without pre-approval, merely by submitting the risk/return summary information in the required manner.
The amendments the SEC is adopting will, as proposed, provide mutual funds with the option to submit tagged financial highlights or condensed financial information as a tagged exhibit to an amendment to the Form N-1A filing to which the information relates. Mutual funds also may continue to submit this information as an exhibit to Form N-CSR, as currently permitted, whether or not they submit tagged risk/return summary information. A mutual fund submitting tagged risk/return summary information may, but is not required to, submit tagged financial highlights or condensed financial information. Similarly, a mutual fund that submits tagged financial highlights or condensed financial information may, but is not required to, submit tagged risk/return summary information.
The effective date of these amendments is August 20, 2007, in order to provide sufficient time to implement EDGAR system changes necessary to provide for risk/return summary functionality.
Please click http://www.sec.gov/news/press/2007/2007-134.htm to access a copy of the press release.
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SEC Adopts Hedge Fund Antifraud Rule, Which Extends to Mutual Funds
7.11.2007 The SEC voted unanimously to adopt a new antifraud rule under the Investment Advisers Act of 1940 that clarifies its ability to bring enforcement actions under the Advisers Act.
The new rule will make it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool. The rule will apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act.
Significantly for the mutual fund industry, a pooled investment vehicle under the new rule will include any investment company and any company that would be an investment company but for the exclusions in Sections 3(c)(1) or 3(c)(7) of the 1940 Act.
Thus, mutual funds will be subject to a new rule approved by the SEC that prohibits fraud in hedge funds and other private investment pools. The mutual fund industry, which has pushed the SEC to adopt hedge fund regulations similar to those governing mutual funds, had argued against being subject to the rule.
The rule will take effect 30 days after its publication in the Federal Register, which usually takes about a week after rules have been approved by the commission.
Please click http://www.sec.gov/news/digest/2007/dig071207.txt to access a copy of the adopting release.
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SEC Proposes Significant Revisions to Form D and the Capital Raising Process
7.2.2007 The SEC proposed significant reforms to rules that govern capital formation, Form D filings and reporting. The major changes include the following:
- reduced disclosure and reporting requirements for companies with a common equity public float of less than $75 million;
- access to "short form" registration on Forms S-3 and F-3 by the same companies for public offerings that do not exceed 20% of their public float in a one-year period;
- expansion and revision of existing registration exemptions for private offerings under Regulation D, including a new exemption for sales with limited public advertising to specified wealthy individuals and institutions;
- enhanced access to the Rule 144 and Rule 145 safe harbors for public resales of restricted securities, including shortened holding periods for resales of securities of reporting companies; and
- exemptions that will reduce the circumstances under which non-reporting companies can become subject to SEC reporting requirements as a result of issuances of compensatory stock options.
The proposed amendments also would:
- mandate the electronic filing of the information required by Form D using a new online filing system that would be accessible using the Internet and that would automatically capture and tag data items;
- revise and update the Form D information requirements; and
- simplify and restructure Form D.
Please click
http://www.sec.gov/rules/proposed/2007/33-8814.pdf to access a copy of the proposing relase.
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Mutual Fund Adviser Charged with Alleged Improper Billing
7.2.2007 The SEC charged Brendan E. Murray ("Murray"), while associated with Cornerstone Equity Advisors, Inc. ("Cornerstone Advisors"), with being engaged in a fraudulent billing scheme bilking funds from Cornerstone Funds, a family of mutual funds registered with the SEC as investment companies and advisory clients of Cornerstone Advisors. According to the SEC, as Cornerstone Funds headed for liquidation and eventual bankruptcy, Murray and another person associated with Cornerstone Advisors began submitting doctored vendor invoices to the Funds requesting payment for certain vendor services that were never provided or were inflated from the actual amounts due. When Cornerstone Funds remitted payment to Voyager Institutional Services, LLC (which paid the vendors) the SEC alleged that Murray and the associate fraudulently skimmed a portion of these payments for their personal gain.
The Initial Decision concluded that Murray, for his role in the fraud, willfully aided and abetted and caused Cornerstone Advisors to violate Section 206 of the Advisers Act and that Murray also willfully violated Section 37 of the 1940 Act.
Please click www.sec.gov/litigation/aljdec/2007/id635jtk.pdf to access a copy of the administrative action.
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SEC Brings Action Against a Hedge Fund Adviser Related to Side Agreements
7.2.2007 The SEC brought charges against Vincent Montagna ("Montagna"), barring Montagna from associating with an investment adviser.
The SEC found that since 1997, Montagna has been president and chief executive officer of Quantus Holdings Company Inc. ("Quantus"), an entity through which he managed Tiburon Asset Management LLC ("Tiburon Asset"), a domestic hedge fund. Since 2000, Montagna has also been president and chief executive officer of Tiburon Investment Management, Ltd. ("Tiburon Management"), an entity through which he managed Tiburon Partners, Ltd. ("Tiburon Partners"), an offshore hedge fund. The SEC further found that from at least October 2000 through February 2004, acting through Quantus and Tiburon Management, Montagna was acting as an investment adviser as defined by Section 202(a)(11) of the Advisers Act.
According to the SEC, Montagna pleaded guilty to one count of wire fraud before the United States District Court for the Southern District of New York. The count of the criminal indictment to which Montagna pleaded guilty alleged that, while acting as an investment adviser, Montagna caused a wire transfer to occur on January 22, 2003, for the purpose of executing a scheme and artifice to defraud. The alleged scheme and artifice involved Montagna's failure to disclose to investors in Tiburon Asset and Tiburon Partners side agreements into which he entered with certain companies in which Tiburon Asset and Tiburon Partners had invested, and these companies either issued stock to him or for his benefit, or paid for certain of his personal expenses.
Please click www.sec.gov/litigation/admin/2007/ia-2621.pdf to access a copy of the administrative action.
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