SEC INITIATES INVESTMENT ADVISER PERFORMANCE ADVERTISING EXAM SWEEP
8.26.2004 In the last several months, the SEC has begun an exam sweep focusing on investment adviser performance advertisements and the methodology used by advisers to calculate their performance figures. The SEC is requesting the adviser to provide its database for each client account that includes:
- the client's name,
- investment objective,
- monthly market values,
- monthly performance and,
- if applicable, composites in which the account is included.
The SEC is also seeking all marketing materials that contain performance information, a copy of each performance composite used during the examination period, and the most recently completed questionnaires submitted to each third-party consultant.
The SEC specifically asked for a detailed description of the performance calculations. Finally, the SEC is requesting a list of any securities the firm fair-valued for a client.
Many advisers are now preparing or revising their compliance manuals. When doing so, it is advisable for them to take into consideration the types of information the SEC is requesting in the sweep examination, especially with respect to implementing controls on performance calculation.
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MUTUAL FUND ADVISER SETTLES FRAUD CHARGE
8.26.2004 The SEC settled with Van Wagoner Capital Management (VWCM), the
investment adviser to the Van Wagoner Funds, and Garrett Van Wagoner,
the owner and manager of VWCM. The SEC order found that Van
Wagoner and VWCM committed fraud and other violations when they
misstated the valuations of certain securities held by the Funds. The
SEC’s order also finds that Van Wagoner and VWCM misled the Van
Wagoner Funds’ shareholders about the size and value of the Funds’
investments in illiquid securities.
The SEC stated in the order that from 1999 through 2001, Van Wagoner invested for the Funds in illiquid
securities issued by private companies, which could not be sold readily.
Although the Funds’ disclosures generally limited these investments to
15% of the portfolios, Van Wagoner invested in illiquid
securities in ways that violated the limitations. Also, contrary to law
and to representations that the Funds made, in late 2000 and at times in
2001, Van Wagoner did not fair value the Funds’ private equity
securities in good faith, which caused the net asset value, or market
price, of the Funds’ shares to be incorrectly stated.
Please click http://www.sec.gov/litigation/admin/ia-2281.htm for a copy of the administrative action.
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SEC SETTLES FRAUD CHARGES AGAINST HEDGE FUND ADVISER
8.24.2004 The SEC settled charges against Matthew Brenner and Darren Silverman, both residents of Florida, who had managed hedge funds. The SEC had alleged that, in connection with the sale of units in
several hedge funds, the merger of those hedge funds, and the later
merger of the hedge funds’ successor entity with another company,
Brenner and Silverman deceived individuals into investing in those funds
through, among other things, misrepresenting the return on those
investments, the risks of those investments, and whether investors could
oppose proposed mergers. The complaint also alleged that Brenner and
Silverman engaged in a variety of other conduct that operated as a fraud
and deceit on investors and sold unregistered securities.
Please click http://www.sec.gov/litigation/admin/34-50240.htm for a copy of the administrative action.
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MUTUAL FUNDS MUST NOW MAKE MORE DISCLOSURE ABOUT THEIR PORTFOLIO MANAGERS
8.23.2004 The SEC amended Forms N-1A and N-2 (the registration forms for mutual funds and closed-end funds) to require those funds to identify in their prospectuses each member of a committee, team, or other group of persons associated with the fund or its investment adviser that is jointly and primarily responsible for the day-to-day management of the fund's portfolio. In addition, the SEC now requires a fund to provide disclosure in its Statement of Additional Information (SAI) regarding other accounts for which the fund's portfolio manager is primarily responsible for the day-to-day portfolio management. The amendments require a fund to disclose the number of other accounts managed by a portfolio manager, and the total assets in the accounts, within each of the following categories:
- registered investment companies;
- other pooled investment vehicles; and
- other accounts.
For each such category, a fund is also required to disclose the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on account performance.
The SEC adopted amendments that require a fund to disclose in its SAI the structure of, and the method used to determine, the compensation of its portfolio managers. In addition, a fund will have to disclose the securities ownership in the fund of each portfolio manager.
All initial registration statements on Forms N-1A, N-2, and N-3, and all post-effective amendments that are annual updates to effective registration statements on these forms, filed on or after February 28, 2005, must include the disclosure required by the amendments.
Please click http://www.sec.gov/rules/final/33-8458.htm for a copy of the adopting release.
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SEC REOPENS RULE-MAKING COMMENT PERIOD FOR ADVISER EXEMPTION FOR BROKER-DEALERS
8.23.2004 The SEC reopened the period for public comment on a rule proposal under the Investment Advisers Act of 1940 that would address the application of the Advisers Act to brokers offering certain full service brokerage services (including advice) for an asset-based fee instead of traditional commissions, mark-ups, and mark-downs, and that would address electronic trading for reduced brokerage commissions. The SEC on November 4, 1999, proposed a rule exempting fee-based brokerage programs from the fiduciary and disclosure standards of the Advisers Act. The Financial Planners Association, among others, raised a number of issues regarding the proposal.
In response, the SEC has reopened the rule-making period to seek comment on the following issues:
- Do current fee-based programs more closely align the interests of investors with those of brokerage firms and their registered representatives than do traditional commission-based services?
- If the SEC determines not to adopt this rule as proposed, what would be the practical impact on broker-dealers?
- Should the SEC require broker-dealers who would seek to rely on the rule nevertheless to register if they market fee-based accounts based on the quality of investment advice provided? For example, should brokers be precluded from using certain terms like "investment advice" and "financial planning" in advertising these services, or is prominent disclosure that an account is a brokerage account sufficient to alert an investor to the nature of the account?
The SEC stated that it will extend the comment period until September 22, 2004, and that it currently intends to reach a final decision on the proposal by December 31, 2004.
Please click http://www.sec.gov/rules/proposed/34-50213.htm to access a copy of the SEC release.
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BANNED INVESTMENT ADVISER PERSONNEL ILLEGALLY ASSOCIATED WITH AN ADVISER
8.20.2004 The SEC settled administrative
proceedings against Steven and Susan Bolla. Steven Bolla had been previously banned from the investment adviser and brokerage industry. The SEC alleged that
Steven Bolla managed the finances of Washington Investment Network, Inc.
(WIN), an investment adviser, and dealt with WIN clients for ten months
after he was barred. The SEC charged Susan Bolla with aiding and
abetting WIN’s violations of the SEC’s bar order. The complaint alleges
that Susan Bolla, who had no previous investment advisory or other
securities experience, was set up as the nominal co-owner of WIN to
conceal her husband’s association with the firm.
The complaint charges that Steven and Susan Bolla aided and abetted
WIN’s investment adviser fraud by failing to disclose Steven Bolla’s
bar, or any other aspect of his disciplinary history, to WIN clients
while Steven Bolla was associating with the firm subsequent to his bar.
The case is significant in that it reminds investment advisers of the importance of accurate and full disclosure in their Form ADV. In addition, it is imperative that advisers have procedures in place to check the background of new employees, even those who are not being hired to manage client accounts.
Please click http://www.sec.gov/litigation/litreleases/lr18837.htm to access a copy of the administrative order.
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HEDGE FUND ADVISER ACCUSED OF DISTRIBUTING FALSE PERFORMANCE RECORDS AND PHONY ACCOUNT STATEMENTS
8.13.2004 The SEC filed an emergency enforcement
action against Angelo Haligiannis and Sterling Watters Group
LP, a hedge fund, as well as the Fund’s general partners,
Sterling Watters Capital Advisors, LLC, and Sterling Watters Capital
Management, Inc.
The complaint alleges that the general partners systematically defrauded investors who purchased limited partnership interests in
the hedge fund. Since 1996, Haligiannis has raised at least $27
million in the hedge fund by grossly misrepresenting the fund’s performance to
investors and potential investors. Haligiannis and Sterling Watters
distributed to investors phony account statements that recorded
fictitious quarterly and annual investment gains and account balances.
Haligiannis and Sterling Watters also inflated Sterling Watters
investment returns in marketing materials in an effort to induce
investments in Sterling Watters. For example, Haligiannis provided
investors marketing materials that falsely claimed that the hedge fund had
$180 million in assets and had achieved returns of over 1,500 percent
since inception. Sterling Watters recently sent
investors quarterly account statements that showed an aggregate of tens
of millions of dollars of investor equity in the fund. In fact, the hedge
fund’s brokerage records show that the fund has lost money over the
years and is now essentially worthless.
Please click http://www.sec.gov/litigation/litreleases/lr18831.htm for a copy of the administrative order.
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HEDGE FUND ADVISER CHARGED WITH A VARIETY OF VIOLATIONS
8.9.2004 The SEC obtained a preliminary injunction against Anthony P.
Postiglione, Jr. (Postiglione), of Malvern, Pennsylvania, William J. Lennon
(Lennon), of Media, Pennsylvania , and two companies they owned and controlled,
namely, Fountainhead Fund, LP, a hedge fund located in Wayne,
Pennsylvania, and its general partner Fountainhead Asset Management, LLC (FAM).
In its complaint, the SEC alleges
that, from November 2001 through the present, Postiglione and Lennon
raised approximately $5 million for the hedge fund from at least 18 private
investors. Through a series of fraudulent acts, Postiglione
and Lennon, acting through FAM, obtained assets fraudulently, lulled
investors into keeping their assets in the hedge fund, and misused investor
funds. The complaint alleges that, from the inception of the hedge fund
through the present, Postiglione and Lennon have:
- sent false quarterly
statements and newsletters to investors,
- consistently overstated the hedge fund's value and performance,
- overstated the amount of Postiglione's personal investment in the hedge fund,
- excessively traded several hedge fund securities accounts for the sole purpose
of generating soft dollar credits, which they then withdrew as cash and
used for, among other things, their own personal living expenses, and
- misappropriated several hundred thousand dollars of hedge fund
assets for their personal use.
Please click http://www.sec.gov/litigation/litreleases/lr18824.htm for a copy of the administrative order.
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ADVISER CHARGED WITH MISREPRESENTING ASSETS UNDER MANAGEMENT AND EARNING UNDISCLOSED ADVIOSRY FEES
8.2.2004 The SEC settled charges with Terese Herwick, a resident
of Santa Monica, California, and the owner and former President of
National Financial Systems, Inc. (NFSI), an unregistered investment
adviser. The SEC alleged that Herwick and NFSI violated the antifraud
provisions of the Investment Advisers Act of 1940 by, among other things, misrepresenting the assets under
NFSI's management and taking undisclosed management fees.
Again, the case is significant in that it reminds investment advisers of the importance of accurate and full disclosure in their Form ADV.
Please click http://www.sec.gov/litigation/admin/ia-2272.htm to access a copy of the administrative order.
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