SEC BRINGS CHARGES AGAINST ADVISER FOR GURANTEEING TAX-FREE, 30% RETURNS
6.26.2003 The SEC brought and settled an administrative action against Anthony W. Blissett that bars him from association with any investment adviser. The SEC's complaint alleged that Blissett fraudulently raised more than $31 million from several thousand investors by selling them securities that falsely guaranteed tax-free, 30% annual returns on investments of $10,000 or more.
Please click http://www.sec.gov/litigation/admin/ia-2139.htm for a copy of the administrative order.
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SEC BRINGS AN ACTION AGAINST ADVISER THAT ADVERTISED INFLATED PERFORMANCE RESULTS
6.20.2003 The SEC brought and administrative action against Oxford Capital Management, Inc. (Oxford) and John G. Danz, Jr. (Danz), finding that Oxford, an investment adviser registered with the SEC, and Danz, president and majority shareholder of Oxford, engaged in a scheme to defraud potential investment adviser clients by advertising inflated performance results and assets under management in Oxford's Enhanced Equity composite. In addition, the Order found that Oxford, through Danz, willfully failed to maintain required books and records.
The Order suspends Danz from association with any investment adviser for three months; limits Danz's participation in any activity related to investment performance calculation or marketing of Oxford's Enhanced Equity composite performance results for twelve months (beginning after the three-month association suspension is completed).
The Order directs Oxford to complete three remedial undertakings:
- retain an independent consultant to conduct a review of Oxford's policies and procedures designed to prevent and detect federal securities law violations;
- retain an independent consultant for 5 years to conduct an annual compliance examination of Oxford; and
- retain a certified public accountant for 5 years to perform an annual review of Oxford's Enhanced Equity composite.
Please click http://www.sec.gov/litigation/admin/ia-2138.htm for a description of the administrative action.
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HEDGE FUND ADVISER SETTLES ADMINISTRATIVE PROCEEDINGS RELATED TO SECURITIES TRADING UNDER REGULATION M
7.17.2003 The SEC instituted and simultaneously settled an
administrative proceeding against Ascend Capital, LLC, Malcolm P.
Fairbairn, the firm's founder and sole manager, and Emily Wang
Fairbairn, a trader at the firm, related to securities trading under
Regulation M, Rule 105, "Short Selling in Connection With a Public
Offering." Rule 105 prohibits covering a short sale with securities
obtained in a public offering if the short sale occurred within five
business days before the pricing of the offering.
The SEC's order finds that on three occasions in 2001, Ascend and
the Fairbairns violated Rule 105 of Regulation M by selling securities
short during the five business days before the pricing of public
offerings, and then covering the short positions with securities
purchased in the offerings.
Please click http://www.sec.gov/litigation/admin/34-48188.htm to access a copy of the administrative order.
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ROYE SPEAKS ON REGULATION OF INVESTMENT COMPANIES BY THE SEC
6.19.2003 SEC's Division of Investment Managment Director Paul Roye spoke at the ALI-ABA's Investment Company Regulation and Compliance Conference in Washington, D.C. on mutual funds and their regulation. He mentioned the recent Congressional inquiry relating to mutual fund fees, noting that while transactional fees, such as sales loads, tend to be relatively transparent, ongoing fund fees and expenses are less so, in part because of the fact that they are deducted from fund assets and are expressed as a percentage of net assets and reflected in reduced account balances. Surveys have indicated that investors may not understand the nature and effect of these ongoing expenses. He added that "for whatever reason, current disclosure documents are not conveying this information effectively. Clearly, more can and should be done."
Please click http://www.sec.gov/news/speech/spch061903pfr.htm for a copy of the speech.
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ROYE TESTIFIES BEFORE CONGRESS ABOUT MUTUAL FUND FEES
6.18.2003 SEC's Division of Investment Managment Director Paul Roye testified before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Committee on Financial Services concerning the Mutual Funds Integrity And Fee Transparency Act Of 2003, H.R. 2420.
He testifed that the bill can provide investors with important information regarding their investments in mutual funds, as well as strengthen the corporate governance standards of mutual funds. He stated that with respect to some provisions, while supporting the goals, the SEC believes the bill should preserve the SEC's flexibility to determine appropriate standards through the notice and comment rulemaking process.
Please click http://www.sec.gov/news/testimony/061803tspfr.htm for a copy of the testimony.
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NEW SAFE HARBOR FOR COMPANIES SEEKING TO AVOID REGISTRATION AS MUTUAL FUNDS
6.16.2003 The SEC adopted Rule 3a-8, under the Investment Company Act of 1940, that provides a safe harbor from the definition of investment company for certain bona fide research and development companies. Research and development companies ("R&D companies") often raise large amounts of capital, invest the proceeds and use the principal and return on these investments to fund their operations during their lengthy product development phase. An R&D company also may purchase a non-controlling equity stake in another company as part of a strategic alliance to conduct research and develop products jointly. Either of these activities may cause an R&D company to fall within the definition of an investment company under the 1940 Act.
To qualify for the nonexclusive safe harbor from investment company status, an R&D company must meet the following conditions:
- Its research and development expenses, for the last four fiscal quarters combined, are a substantial percentage of its total expenses for the same period;
- Its net income derived from investments in securities, for the last four fiscal quarters combined, does not exceed twice the amount of its research and development expenses for the same period;
- Its expenses for investment advisory and management activities, investment research and custody, for the last four fiscal quarters combined, do not exceed five percent of its total expenses for the same period;
- Its investments in securities are capital preservation investments, except that:
- No more than 10 percent of the issuer's total assets may consist of other investments, or
- No more than 25 percent of the issuer's total assets may consist of other investments, provided that at least 75 percent of such other investments are investments made pursuant to a collaborative research and development arrangement;
- It does not hold itself out as being engaged in the business of investing, reinvesting or trading in securities, and it is not a special situation investment company;
- It is primarily engaged, directly, through majority-owned subsidiaries, or through companies which it controls primarily, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities, as evidenced by:
- The activities of its officers, directors and employees;
- Its public representations of policies;
- Its historical development; and
- An appropriate resolution of its board of directors, which resolution or action has been recorded contemporaneously in its minute books or comparable documents; and
- Its board of directors has adopted a written investment policy with respect to the issuer's capital preservation investments.
Please click http://www.sec.gov/rules/final/ic-26077.htm to access a copy of the release adopting the rule.
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HOUSE MEMBER PROPOSES A BILL THAT WOULD EXPAND MUTUAL FUND DISCLOSURE
6.11.2003 Representative Richard Baker of Louisiana introduced a bill that calls for the SEC to adopt new rules on mutual fund disclosure that would provide investors with more information on fund costs and business practices. In addition to providing mutual fund investors with disclosures about estimated operating expenses incurred by shareholders, soft dollar arrangements, portfolio transaction costs, sales load breakpoints, directed brokerage and revenue sharing arrangements, the Bill also would require disclosure of information on how fund portfolio managers are compensated and require fund advisers to submit annual reports to fund directors on directed brokerage and soft-dollar arrangements, as well as revenue sharing.
Congressman Baker's bill would also require two-thirds of a fund's board of directors be independent and would narrow the definition of independence. The bill additionally would require the SEC to study new trends in the use of soft dollars in the mutual fund industry.
Please click http://financialservices.house.gov/media/pdf/sect%20by%20sect.pdf for a copy of the bill.
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ADVISER FOUND TO VIOLATE ADVISERS ACT FOR ALLOCATING IPOs TO MUTUAL FUND DIRECTORS
6.8.2003 The SEC found that Monetta Financial Services, Inc. (MFS), a registered investment adviser, violated Section 206(2) of the Investment Advisers Act of 1940 and that Robert S. Bacarella, MFS' president, aided, abetted, and was a cause of MFS' violations. MFS was adviser to certain mutual funds. Through Bacarella, MFS allocated IPOs to directors and trustees, including an independent trustee, of its fund clients. The SEC found that Bacarella thereby created a potential that the director and trustees would favor MFS' interests over the funds. However, Bacarella did not disclose this conflict of interest to the funds' boards. The SEC also stated that allocation of a security of limited availability to a fund director constitutes a "red flag" that would strongly indicate that the director was receiving special treatment and that a fund would face a high burden to justify why disclosure to investors of that transaction was not appropriate.
The SEC censured MFS and imposed a civil money penalty of $200,000, suspended Bacarella from association with any investment adviser or investment company for 90 days and imposed a civil money penalty of $100,000 on Bacarella, and ordered the respondents to cease and desist from violations of Section 206(2) of the Advisers Act. Bacarella's suspension is effective June 23, 2003. The SEC dismissed the proceeding against Richard D. Russo, a trustee of the Monetta Trust.
Please click http://www.sec.gov/litigation/admin/ia-2129.htm to access a copy of the administrative action.
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NASD PROPOSES RULE REQUIRING BROKER-DEALERS TO HAVE COMPLIANCE CERTFICATION BY CERTAIN OFFICERS
6.4.2003 The NASD proposed A rule that would require each member broker-dealer to designate a Chief Compliance Officer who, jointly with the member's Chief Executive Officer, must certify annually that the member has in place adequate compliance and supervisory policies and procedures.
The NASD stated that:
- Certification is meant to foster ongoing attention by firm senior management to its compliance and supervisory systems and increase interaction between senior business officers and compliance and legal officers.
- The CEO and Chief Compliance Officer will be certifying as to the adequacy of the compliance and supervisory system, but not necessarily the implementation of that system in each instance.
- No liability will accrue to the signatories, provided that when they sign they have a reasonable basis for doing so, and do so consistent with high standards of commercial honor and just and equitable principles of trade.
Please click http://www.nasdr.com/pdf-text/0329ntm.pdf to access a copy of the Notice to Members proposing the rule.
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