ADVISER ORDERED TO DISGORGE FEES TO CLIENTS BECAUSE OF INADEQUATE DISCLOSURE
7.20.2001 The SEC ordered Founders Asset Management LLC and Bjorn Borgen, its President and sole owner, to disgorge $590,000 to the firm's advisory clients because it failed to make certain required disclosures in the firm's Form ADV. The $590,000 will be distributed to clients on a pro rata basis. Mr. Borgen was also suspended from the industry for 180 days.
Please click http://www.sec.gov/litigation/admin/ia-1953.htm to access a copy of the release announcing the disgorgement.
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FALSE STATEMENTS MADE BY ADVISER RESULTS IN $43,000 DISGORGEMENT ORDER
7.20.2001 The SEC ordered Owen-Joseph Asset Management Corp. (OJAM) and William Foster to disgorge $43,000 to clients because the firm made certain false statements to clients in violation of the Investment Advisers Act of 1940. The disgorgement will be distributed to clients based on their monetary harm. OJAM was also censured by the SEC.
Please click http://www.sec.gov/litigation/admin/ia-1952.htm to access a copy of the release announcing the disgorgement.
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OHIO ADVISER KICKED OUT OF INDUSTRY
7.19.2001 The SEC permanently barred Stephen G. Donahue, an adviser located in Cincinnati, Ohio, from any association with an investment adviser or broker-dealer. Mr. Donahue was also a registered representative and an assoicated person of a broker-dealer.
Mr. Donahue had been charged with operating a scheme that resulted in over $6 million of client assets being misappropriated. Mr. Donahue had represented to clients that their assets would be deposited in investment funds, when in fact the funds were deposited in Mr. Donahue's personal accounts.
Please click http://www.sec.gov/litigation/litreleases/lr17075.htm to access a copy of the release announcing the enforcement action.
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2002 CRD/IARD RENEWAL SCHEDULE RELEASED
7.18.2001 The NASDR announced the 2002 schedule for Web CRD/IARD renewals. Renewal payments must be made by December 7, 2001.
Please click http://www.nasdr.com/3400_renewals.htm to access the schedule.
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SEC FURTHER EXTENDS TIME FOR BANKS TO COMPLY With GRAMM-LEACH-BLILEY ACT BROKER-DEALER REGISTRATION REQUIREMENTS
7.17.2001 On May 11, 2001, the Securities and Exchange Commission (SEC) issued interim final rules ("Rules") that define certain terms used in, and grant additional exemptions from, the amended definitions of "broker" and "dealer." The Rules include Rule 15a-7, which gives banks a temporary exemption from the definitions of "broker" and "dealer" until October 1, 2001, and provides an additional conditional exemption until January 1, 2002. The SEC issued an order on July 17, 2001 that delays the date for compliance with the new statutory scheme under the Gramm-Leach-Bliley Act to May 22, 2002. A separate rule extends the exceptions and exemptions granted to banks under the statute and Rules to savings associations and savings banks.
The Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency had sent a letter to the SEC urging it to reconsider its approach and give banks a one-year grace period for compliance with new rules affecting the financial services industry.
The dispute stems from the SEC's efforts to define what kind of securities businesses banks can operate without direct SEC supervision. This effort is mandated by the 1999 Gramm-Leach-Bliley Act that allows banks, brokerages and insurers to merge and offer a full range of financial services.
The new regulations remove blanket exemptions for banks in favor of more specific, financial-service focused exemptions. Bank regulators say that these rules will affect banks' abilities to provide trust and fiduciary services, offer investment advice and to act as a liaison between customers and registered broker-dealers. However, the SEC points out that Gramm-Leach-Bliley Act was not intended to provide a loophole for banks to operate brokerage houses out of the reach of SEC regulation.
Please click http://www.sec.gov/rules/other/34-44570.htm for a copy of the SEC order.
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ICI WARNS AGAINST MORE FREQUENT DISCLOSURE
7.17.2001 The Investment Company Institute (ICI), the mutual-fund industry trade group, sent a letter to the Securities and Exchange Commission (SEC) urging the SEC to reject suggestions, from consumer groups and financial planners, to increase the frequency of mutual-fund portfolio disclosures. The SEC is considering the change as part of an initiative to improve the usefulness of a mutual fund's shareholder reports.
The ICI argues that average investors are more likely to be harmed than helped if mutual funds are required to reveal their portfolio holdings more than the current, twice-a-year requirement. For instance, more frequent disclosure would help professional traders and other opportunists more successfully "front run" a mutual funds manager's trades by helping to identify the stocks the fund is in the process of buying and selling.
Also, more frequent information would allow speculators to more accurately "free ride" on a mutual fund manager's proprietary research investment strategies.
Please click http://www.ici.org/issues/communications.html and click "Portfolio Disclosure" to access a copy of the press release announcing the letter. The press release has a link to the actual letter.
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SEC SUES UNREGISTERED INVESTMENT ADVISER FOR FRAUD
7.17.2001 The SEC filed a complaint alleging securities fraud and misappropriation of client funds against a Santa Monica, California-based unregistered investment adviser doing business as Stonehedge Capital LLC. The SEC alleged that Stewart used some of the funds to purchase real estate and to buy and lease luxury cars.
Stewart consented to an injunction enjoining him from future violations, he has repaid approximately half of the amount misappropriated, and is required to disgorge the balance.
Please click http://www.sec.gov/litigation/litreleases/lr17071.htm for a copy of the administrative action.
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NASDR PROPOSES ADDITIONAL DISCLOSURE FOR RECOMMENDATIONS ON SECURITIES
7.12.2001 The NASDR issued a proposal to increase the disclosures required when an NASD member recommends a security in written advertisements and sales literature. The proposed amendment to Rule 2210, Communications with the Public, would also require similar disclosures for recommendations made by an associated person during a public appearance, such as radio and television interviews.
Currently, NASD members are not required to disclose ownership interest in a recommended equity security. Instead, the member must disclose whether an officer, partner, or the member firm itself owns options, rights, or warrants to purchase any of the recommended issuer's securities. The proposal would require that the NASD member disclose that the person(s) responsible for a recommendation, or any discretionary account managed by such person(s), has a financial interest in any security of the recommended issuer.
Comments on the proposal are due to the NASDR by August 15, 2001.
Please click http://www.nasdr.com/2610_2001.asp to access a copy of the proposal.
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CUTLER NAMED ACTING DIRECTOR OF THE SEC DIVISION OF ENFORCEMENT
7.12.2001 Acting Chairman Laura Unger named Stephen Cutler Acting Director of the SEC Division of Enforcement. Mr. Cutler has served as the Division's Deputy Director since January 1999, and succeeds Richard Walker, who recently announced his intention to leave the Commission after assisting with the transition to a new Chairman.
Before joining the Commission, Mr. Cutler was a partner at the Washington, D.C. law firm of Wilmer, Cutler & Pickering. He received his B.A. summa cum laude from Yale University and his law degree from Yale Law School.
Please click http://www.sec.gov/news/press/2001-69.txt to access a copy of the release announcing the appointment of Mr. Cutler and click http://www.sec.gov/news/press/2001-68.txt for the release announcing Mr. Walker's departure.
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AIMR BOARD SEEKS PUBLIC COMMENT ON ISSUES PAPER ON ANALYST INDEPENDENCE
7.10.2001 The Association for Investment Management and Research (AIMR) requested comments on its Proposed Issues Paper, Preserving the Integrity of Research. In the Proposed Paper, the Task Force on Analyst Independence identifies and discusses the conflicts of interests and pressures experienced by analysts working for investment banking/brokerage firms that may bias their research reports and recommendations. AIMR's goal is to understand the nature and extent of these conflicts and pressures as a first step toward developing strong standards to minimize and manage such conflicts.
Full instructions are available in the Invitation to Comment on the AIMR website at http://www.aimr.org
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CFTC APPROVES FIRST NEW DCO REGISTRATION
7.9.2001 The Commodity Futures Trading Commission (CFTC) announced that it approved the application of EnergyClear Corporation for registration as a derivatives clearing organization (DCO) under the Commodity Exchange Act. This is the first new DCO, not affiliated with a trading facility, to be granted registration by the CFTC since the passage of the Commodity Futures Modernization Act of 2000 last December. DCOs for the existing futures exchanges were grandfathered in under the CFMA and the CFTC has previously approved DCOs affiliated with OnExchange Board of Trade, Inc. and Brokertec Futures Exchanges.
Please click http://www.cftc.gov/opa/press01/opa4540-01.htm for the release announcing the new registration.
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NASAA COORDINATED REVIEW PROJECT GROUP SOLICITS COMMENTS ON PROPOSED RISK DISCLOSURE GUIDELINES
7.6.2001 The North American Securities Administrators Association (NASAA), the association of blue-sky administrators in the U.S., Canada and Mexico, released its proposed Risk Disclosure Guidelines for comment. These Guidelines are intended to assist issuers and attorneys in writing risk disclosure by collecting in one place the general principles, as well as specific formatting directions, that are now scattered among regulatory guidance. This effort is part of NASAA's continuing effort to promote uniformity in state securities regulation.
Please click http://www.nasaa.org and click "Archived Stories" find the announcement.
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SEC GRANTS CONTESTED MANAGER OF MANAGERS EXEMPTIVE ORDER
7.6.2001 The SEC published its order granting a manger of managers exemptive order for Hillview Investment Trust and denying a request for a hearing.
In "manager of managers" or "mulitmanager" arrangements a single investment adviser to a mutual fund complex selects and retains subadvisers to the various funds in the complex. The investment adviser treats the subadvisers in a capacity similar to that of individual portfolio managers, and it can enter into and materially amend subadvisory agreements without shareholder approval. In the absence of SEC exemptive relief, each new or materially amended subadvisosry agreement would require a special meeting and vote of shareholders. The SEC has approved approximately 70 such exemptive orders since 1995.
In requesting a hearing on Hillview's exemptive order application, Fund Democracy, LLC argued that a fund with only one subadviser should not be entitled exemptive relief, and that the conditions attached to the proposed exemptive order were inadequate.
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NASAA INTRODUCES INVESTMENT ADVISER GUIDE
7.6.2001 NASAA has made available its Investment Adviser Guide designed to help state-licensed advisers understand and copy with state regulations. The guide provides information on the changes brought about by NSMIA, recordkeeping, disclosure requirements, fiduciary duties, and what to expect from securities staff during an audit.
Please click http://www.nasaa.org and click "Investment Advisor" in the drop down to find the Investment Advisor Guide.
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SEC ADOPTS NEW RULE FOR REPURCHASE AGREEMENTS AND REFUNDED SECURITIES
7.5.2001 The SEC issued a release adopting a new rule and related amendments under the Investment Company Act of 1940 that affect the ability of funds to invest in repurchase agreements and pre-refunded bonds. New Rule 5b-3 permits a fund to treat a repurchase agreement as an acquisition of the underlying securities for purposes of Sections 5(b)(1) and 12(d)(3) of the 1940 Act. The rule also provides similar "look-through" treatment for purposes of Section 5(b)(1) in the case of an investment in state or municipal bonds, the payment of which has been fully funded by escrowed U.S. Government securities.
The final rule becomes effective August 15, 2001.
Please click http://www.sec.gov/rules/final/ic-25058.htm to access a copy of the release announcing the rule adoption.
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