to adopt extensive new policies and procedures.
In a related matter, the SEC filed a complaint against CSFB in the U.S. District Court for the District of Columbia, alleging violations of certain Conduct Rules of the NASD, and of books and records requirements under the federal securities laws. According to the complaint, in exchange for shares in "hot" IPOs, CSFB wrongfully extracted from certain customers a large portion of the profits that those customers made by immediately selling (also called "flipping") their IPO stock. The profits were channeled to CSFB in the form of excessive brokerage commissions generated by the customers in unrelated securities trades that the customers effected solely to share the IPO profits with CSFB.
Please click http://www.sec.gov/litigation/litreleases/lr17327.htm to access the administrative action.
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OFFSHORE HEDGE FUND ADVISER CHARGED WITH PORTFOLIO PUMPING
1.17.2002 The SEC announced today that it has obtained a preliminary injunction against Burton G. Friedlander, 62, and four related entities, in a case involving "portfolio pumping" and other securities fraud pending in the United States District Court for the Southern District of New York.
The SEC filed its complaint in May of 2001, alleging fraud in connection with Friedlander's management of the assets of Friedlander International Limited, an overseas hedge fund. The SEC contended that Friedlander inflated the hedge fund's net asset value by improperly and arbitrarily valuing certain unlisted securities of a company in which Friedlander and entities he controlled had heavily invested. The SEC's complaint also alleged that, between at least August 2000 and December 2000, Friedlander engaged in purchases of a thinly traded common stock as part of a manipulative scheme to inflate the value of that stock and to inflate the hedge fund's net asset value.
In granting the preliminary injunction, the judge determined that Friedlander had disregarded a court-ordered process for obtaining input from the investors and had attempted to withdraw money from a hedge fund account despite a prior commitment not to do so without obtaining a court order.
Please click http://www.sec.gov/litigation/litreleases/lr17315.htm to access a copy of the administrative action.
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ICI SUBMITS COMMENT LETTER ON ETFs
1.15.2002 The Investment Company Institute (ICI), the trade group for the mutual fund industry, sent a letter to the SEC commenting on the concept release on actively managed exchange-traded funds (ETFs), which was recently issued by the SEC. The ICI stated in the letter that actively managed ETFs present certain investment protection concerns not present in the trading of existing ETFs. These concerns include portfolio holdings disclosure, adding a class of an actively-managed ETF to a mutual fund, and conflicts of interest involving the adviser to the ETF.
Please click http://www.ici.org/ici_info/sec_active_etfs_cvr.html to access a copy of the comment letter.
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IM DIRECTOR ROYE SPEAKS ON ETF ISSUES
1.14.2002 Paul Roye, the Director of the SEC's Division of Investment Management, spoke on a variety of issues related to ETFs at the American Stock Exchange Symposium on Exchange Traded Funds held in New York. Exchange Traded Fund (ETF) topics discussed included:
- Exemptive orders for ETFs;
- Organization of an ETF;
- Listing an ETF on exchange;
- ETF prospectus disclosure;
- Fixed-income ETFs; and
- Actively managed ETFs.
Please click http://www.sec.gov/news/speech/spch534.htm to access a copy of the speech.
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KPMG CENSURED FOR AUDITOR INDEPENDENCE VIOLATION
1.14.2002 The SEC censured KPMG LLP for violating the SEC's auditor independence rules. Section 30 of the Investment Company Act of 1940 requires that all financial statements included in annual reports sent to investment company shareholders, or filed with the SEC, be accompanied by a "certificate of independent public accountants." Section 2-01 of Regulation S-X, both before and after the SEC's recent amendments thereto, clearly states that the SEC does not consider an accountant to be "independent" from its client if the accountant has any direct financial interest or material indirect financial interest in the client.
Until December 2000, KPMG was the principal outside auditor for the AIM Funds, a mutual fund complex located in Houston, Texas. In recent years, KPMG audited the financial statements of between 45 and 50 different AIM funds.
The SEC found that KPMG violated the auditor independence rules by making substantial investments in certain AIM funds. In the SEC's view, KPMG issued audit reports while its independence was impaired. The SEC also found that KPMG lacked adequate policies and procedures designed to prevent and detect independence problems caused by investments of the firm's surplus cash.
Please click http://www.sec.gov/litigation/admin/34-45272.htm to access a copy of the administrative action.
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IM DIRECTOR ROYE SPEAKS ON THE REGULATION OF INSURANCE PRODUCTS
1.10.2002 Paul Roye, the Director of the SEC's Division of Investment Management, spoke on a variety of issues related to the regulation of insurance products at a PLI conference in New York called "Understanding Securities Products of Insurance Companies. Topics discussed included:
- Electronic variable annuities;
- Private remedies regarding contract fees;
- Exchanges of variable annuity contracts;
- Substitutions of underlying funds of variable annuities;
- Redemption fees;
- Enforcement actions; and
- Annuity switching.
Please click http://www.sec.gov/news/speech/spch533.htm to access a copy of the speech.
OCC ISSUES COMPTROLLER'S HANDBOOK ON CUSTODY OF SECURITIES
1.8.2002 The Office of the Comptroller of the Currency (OCC) issued a handbook on securities custody and related services. The OCC regulates national banks. In the past, the OCC has issued other handbooks that provide guidance to national banks engaging in securities operations, including:
- Asset Management (December 2000);
- Community Bank Fiduciary Activities Supervision (December 1998);
- Conflicts of Interest (June 2000); and
- Investment Management Services August 2001.
Please click http://www.occ.treas.gov/handbook/amgt.htm to access a copy of the handbooks.
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NEW MEXICO ADVISER BARRED FROM INDUSTRY FOR FALSE ADVERTISING
1.4.2002 The SEC barred Merrimac Advisors Corporation and its principal Frederic French from the investment advisory industry for engaging in false advertising. They were also censured and fined by the SEC.
The SEC took the action in light its practice of using a false track record in the presentations made to existing and prospective clients. Merrimac also inflated its assets under management in marketing pieces. In addition, the SEC found that Merrimac and French failed to make and keep true, accurate and current records and documents necessary to form the basis for, or demonstrate the calculation of, the performance or rate of return of client accounts or recommendations referenced in any advertisement or other communications to ten or more persons.
Please click http://www.sec.gov/litigation/admin/ic25356.htm to access the administrative action.
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