MUTUAL FUND AND BROKER-DEALER ANTI-MONEY LAUNDERING RULES FINALIZED
4.29.2003 The Department of the Treasury, through the Financial Crimes Enforcement Network (FinCEN), and the SEC jointly adopted a final rule to implement Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001. As required by Section 326, the Treasury Department and the SEC adopted a rule that requires investment companies and broker-dealers to implement procedures to verify the identity of any person seeking to open an account; to maintain records of the information used to verify the person's identity; and to determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to investment companies by any government agency.
Please click http://www.sec.gov/rules/final/ic-26031.htm for the release adopting the anti-money laundering rules applicable to investment companies.
Please click http://www.sec.gov/rules/final/34-47752.htm for the release adopting the anti-money laundering rules applicable to broker-dealers.
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NATION'S TOP INVESTMENT FIRMS SETTLE ENFORCEMENT ACTIONS INVOLVING
CONFLICTS OF INTEREST BETWEEN RESEARCH AND INVESTMENT BANKING
4.28.2003 Enforcement actions against the following ten firms were brought by the SEC, NASD, the New York Stock Exchange (NYSE), and the State of New York and various other state securities regulators:
� Bear, Stearns & Co. Inc. (Bear Stearns)
� Credit Suisse First Boston LLC (CSFB)
� Goldman, Sachs & Co. (Goldman)
� Lehman Brothers Inc. (Lehman)
� J.P. Morgan Securities Inc. (J.P. Morgan)
� Merrill Lynch, Pierce, Fenner & Smith, Incorporated (Merrill Lynch)
� Morgan Stanley & Co. Incorporated (Morgan Stanley)
� Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc. (SSB)
� UBS Warburg LLC (UBS Warburg)
� U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray)
The action followed
joint investigations by the regulators of allegations of undue influence
of investment banking interests on securities research at brokerage
firms.
Pursuant to the enforcement actions, the ten firms will pay a total of
$875 million in penalties and disgorgement, consisting of $387.5 million
in disgorgement and $487.5 million in penalties (which includes Merrill
Lynch's previous payment of $100 million in connection with its prior
settlement with the states relating to research analyst conflicts of
interest). Under the settlement agreements, half of the $775 million
payment by the firms other than Merrill Lynch will be paid in resolution
of actions brought by the SEC, NYSE and NASD, and will be put into a
fund to benefit customers of the firms. The remainder of the funds will
be paid to the states. In addition, the firms will make payments
totaling $432.5 million to fund independent research, and payments of
$80 million from seven of the firms will fund and promote investor
education. The total of all payments is roughly $1.4 billion.
Please click http://www.sec.gov/news/press/2003-54.htm to access a copy of the joint press release announcing the administrative actions.
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OCIE DIRECTOR GIVES SPEECH ON THE CULTURE OF COMPLIANCE
4.23.2003 Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), gave a speech at the National Regulatory Service's Spring Compliance Conference in Tucson, Arizona on the culture of compliance.
Ms. Richards stated that in many cases it seems clear that the culture of immediate, short-term profit overwhelmed the culture of compliance. In some of these situations, the SEC observed that knowledgeable and dedicated compliance staff were ignored, were not relevant, or were too distant from the business unit involved.
OCIE has been working on new examination methodologies for both broker-dealers and investment advisers. OCIE's goal is to have a systematic means of assessing a firm's culture of compliance.
She stated that every good culture of compliance has at least the following five elements:
- Compliance activities have to relate to some larger strategic goal.
- It identifies the specific risks that could arise within each strategic area. The devil, as they say, is in the details.
- It establishes control points for each of these risks.
- It is well documented. Documentation provides transparency, both internal, to senior management, and external, to auditors and regulators.
- Specific people are accountable for managing each specific element of the compliance system. You can have the best policies and procedures in the world, but if no one is making them work, they will be useless.
Please click http://www.sec.gov/news/speech/spch042303lar.htm for a copy of the speech.
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NASD FINES BROKER-DEALER AND COMPLIANCE OFFICER FOR HEDGE FUND SALES VIOLATIONS
4.22.2003 The NASD censured and fined Altegris Investments, Inc. of La Jolla, California $175,000 for failing to disclose the risks associated with hedge funds when marketing them to investors. Some of the firm's sales literature also contained exaggerated and unwarranted statements about these products. NASD also censured and fined Altegris' Chief Compliance Officer, Robert Amedeo, $20,000 for failing to adequately supervise the firm's advertising practices in this area.
Among the items that Altegris failed to disclose about the specific hedge funds were the following:
- The fund is speculative and involves a high degree of risk.
- The fund may be leveraged.
- The fund's performance can be volatile.
- An investor could lose all or a substantial amount of his or her investment.
- The fund manager has total trading authority over the fund. The use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequentially, higher risk.
- There is no secondary market for the investor's interest in the fund and none is expected to develop.
- There may be restrictions on transferring interests in the fund.
- The fund's high fees and expenses may offset the fund's trading profits.
- A substantial portion of the trades executed for the fund takes place on foreign exchanges.
Please click http://www.nasdr.com/news/pr2003/release_03_015.html for a copy of the release.
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MISSOURI ADVISER CHARGED WITH FRAUD
4.18.2003 The SEC instituted public administrative proceedings
against Gregory L. Fears, formerly of Joplin, Mo. The SEC
instituted the proceeding based upon Fears' alleged twenty-
two count criminal conviction. It alleges, among other things, that Fears was an investment
adviser and was associated with Investors Financial, Inc., an investment
advisory firm formerly registered with the SEC, and with World
Securities, Inc., a broker-dealer registered with the SEC. In
addition the SEC alleges that in the case of U.S. v. Gregory L.
Fears in the United States District Court for the
Western District of Arkansas, Fears pled guilty and was convicted on a
twenty-two count criminal information. Fears' conviction included three
counts of investment advisory fraud, one count of wire fraud, five
counts of money laundering, six counts of loan fraud and seven counts
for criminal forfeiture.
Please click http://www.sec.gov/litigation/admin/34-47699.htm for a copy of the administrative order.
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REGULATORS ISSUE INTERAGENCY PAPER ON SOUND PRACTICES TO STRENGTHEN THE
RESILIENCE OF THE U.S. FINANCIAL SYSTEM
4.8.2003 Three federal regulatory agencies issued the "Interagency
Paper on Sound Practices to Strengthen the Resilience of the U.S.
Financial System." Among other things, the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency,
and the Securities and Exchange Commission identified sound practices to
strengthen the resilience of critical U.S. financial markets and
minimize the immediate systemic effects of a wide-scale disruption.
On Sept. 5, 2002, the agencies published for comment a draft of the
paper in the Federal Register. The agencies have incorporated many of
the suggestions that were made. The final paper, which applies most
directly to the clearing and settlement activities of a limited number
of financial institutions, provides more flexibility to firms in
managing geographic dispersion of backup facilities and staffing
arrangements, and takes into account other considerations relevant to
cost-effective implementation of sound practices.
Please click http://www.sec.gov/news/studies/34-47638.htm for a copy of the paper.
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NASAA ISSUES COMMENT LETTER ON SEC'S PROPOSED COMPLIANCE RULE
4.8.2003 The North American Securities Administrators Association, Inc. (NASAA) commented on the SEC's proposed rule on �Compliance Programs of Investment Companies and Investment
Advisers.� NASAA addressed many of the questions posed by the SEC in the release.
Please click http://www.nasaa.org/nasaa/abtnasaa/display_top_story.asp?stid=362 for a copy of the comment letter.
SEC DIRECTOR OF INVESTMENT MANAGEMENT GIVES SPEECH ON MUTUAL FUND INDUSTRY
3.31.2003 During a speech at the 2003 Mutual Funds and Investment Management Conference in Palm Desert, California, Paul Roye, Director of the Division of Investment Management of the SEC, stated that the SEC is close to issuing two new rule proposals intended to improve the presentation in mutual fund shareholder reports and to modernize fund advertising rules. The shareholder report proposal would require funds to disclose their portfolio holdings on a quarterly basis, rather than semi-annually as currently required. Mr. Roye stated that quarterly reporting would allow shareholders to better monitor their investments and make better asset allocation decisions and also allow for greater scrutiny of the composition of fund portfolios and portfolio management techniques. The advertising rule proposal would increase funds� flexibility in advertising by eliminating the requirement in Rule 482 under the Securities Act of 1933 that fund advertisements relying on that rule contain only information the substance of which is included in the fund�s prospectus.
Mr. Roye also commented on the SEC�s concept release which discusses the creation of a self- regulatory body like the NASD to oversee compliance with the federal securities laws in the fund industry, a congressional inquiry requesting the SEC to provide its views, including recommendations for legislative and/or regulatory actions, a new approach for review of exemptive applications, industry criticism of the new proxy voting disclosure rules, the recent sweep of broker-dealers which uncovered significant failures to deliver breakpoint sale load discounts to eligible mutual fund investors, and the SEC�s fact-finding inquiry regarding hedge funds.
Please click http://www.sec.gov/news/speech/spch033103pfr.htm for a copy of the speech.
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