SEC ISSUES REPORT ON HEDGE FUNDS
9.29.2003 SEC Chairman William H. Donaldson issued the following statement in connection with the New York State Attorney General investigation of certain mutual funds' involvement in market timing by a hedge fund:
The SEC staff released a report titled "The Implications of the Growth of Hedge Funds." The report follows a fact-finding investigation into the operations and practices of the hedge fund industry.
During its investigation, SEC staff reviewed documents and information from 65 hedge fund advisers managing more than 650 different hedge funds with over $160 billion of assets. Staff also visited hedge fund advisers and prime brokers and conducted a series of examinations of registered funds of hedge funds. In addition, the staff met with a variety of hedge fund industry experts and observers.
Please click http://www.sec.gov/news/studies/hedgefunds0903.pdf for a copy of the SEC report, which is in a PDF file.
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SEC AMENDS MUTUAL FUND ADVERTISING RULES
9.29.2003 The SEC amended mutual fund advertising rules. Significantly, the SEC removed the requirement that a rule 482 advertisement contain only information the "substance of which" is included in the statutory prospectus. Eliminating this requirement will permit mutual funds to include up-to-date information in rule 482 advertisements, such as information about current economic conditions that normally would not be included in a fund's prospectus. The amendment also will permit funds to eliminate certain information from the statutory prospectus, such as boilerplate disclosure about the methods used to calculate performance in fund advertising, that clutters the statutory prospectus and obscures other important information. As a result, investors should receive better, more understandable, and more timely information in both the statutory prospectus and fund advertisements. In addition, the costs of regulatory compliance should be reduced for funds and, ultimately, for investors.
Please click http://www.sec.gov/rules/final/33-8294.htm to access a copy of the release adopting the amended rules.
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NASD ISSUES NOTICE TO MEMBERS ON MUTUAL FUND SALES PRACTICES
9.20.2003 The issued a Notice to Members requesting comment on rule changes that would expand the disclosure of compensation paid for the sale of mutual fund shares, alerting investors that brokers may have financial incentives to recommend particular funds. The Notice to Members also includes a reminder to members of their responsibilities in selling fund shares.
Please click http://www.nasdr.com/2610_2003.asp#03-54 for access to the Notice to Members.
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SEC ADOPTS AMENDMENTS TO ADVISER CUSTODY RULE
9.25.2003 The SEC adopted amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940 that significantly revise the rules on how clients assets must be maintained by clients. For the first time, the SEC defined "custody." The revised rule now defines "custody" to mean custody." An adviser has custody of client assets, and therefore must comply with the rule, when it holds, "directly or indirectly, client funds or securities or [has] any authority to obtain possession of them."
The rule permits an investment adviser to maintain client assets at a broker-dealer or bank, or to hold client assets directly. If an adviser elects to maintain client assets directly, it must, among other requirements, have the assets verified by an independent accountant. The revised rule also has special execeptions addressing the custody of hedge fund assets.
The effective date of the amendments is November 5, 2003. Advisers must comply with the amended rule by April 1, 2004.
Please click http://www.sec.gov/rules/final/ia-2176.htm for a copy of the release adopting the amendments to the rule.
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CEASE-AND-DESIST ORDER ISSUED AGAINST INVESTMENT NEWSLETTER PUBLISHER
9.25.2003 The SEC instituted a settled cease-and-desist
order against Scott Simon Fraser, who resides in Del Mar,
California. The SEC found that Fraser had disseminated
materially false and misleading statements in promotional materials that
he sent to prospective subscribers to his newsletter between August 2001 and November 2001.
Fraser is alleged to have violated the antifraud provisions of the federal securities
laws by misrepresenting the performance record of his stock
recommendations and the success of his subscribers. For example, Fraser
falsely claimed that: (1) the stocks he recommended to his subscribers
over a 28 month period had increased an average of 135%, (2) 14
consecutive stocks that he recommended each increased over 100%, (3)
three of the stocks he recommended increased by 660%, 230%, and 915%,
and (4) over 1,170 of his subscribers had become "multi-millionaires" by
following his trading recommendations.
Please click http://www.sec.gov/litigation/admin/34-48544.htm for a copy of the administrative order.
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SEC ENFORCEMENT CHIEF GIVES SPEECH ON ADVISER CONFLICTS OF INTERESTS
9.9.2003 Stephen M. Cutler, Director of the SEC's Division of Enforcement gave a speech at the The National Regulatory Services Investment Adviser and Broker-Dealer Compliance/Risk Management Conference in Charleston, South Carolina where he addressed conflicts of interest in the advisory industry. He noted that the SEC has brought a number of cases involving preferential allocation of hot IPOs by investment advisers.
Please click http://www.sec.gov/news/speech/spch090903smc.htm for a copy of the speech.
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SEC CHAIRMAN ISSUES STATEMENT ON MUTUAL FUND INVESTIGATION
9.3.2003 SEC Chairman William H. Donaldson issued the following statement in connection with the New York State Attorney General investigation of certain mutual funds' involvement in market timing by a hedge fund:
"The conduct alleged in the complaint is reprehensible and there is no place for it in our markets. Today's action further illustrates the importance of the SEC's ongoing review of both hedge funds and mutual funds and the SEC's upcoming recommendations regarding improvements and increased disclosure requirements for both. As we have stated in announcing our current and ongoing study of hedge funds, there is too much money at stake for us to know as little as we do about these funds, in particular, and how they operate. Concurrently, the broad participation by individual investors in mutual funds requires that we do everything possible to understand, anticipate and address areas where there is the potential for abuse and fraud."
New York Attorney General Eliot Spitzer earlier had announced a state
investigation of a hedge fund and its managers for late trading and
market timing with respect to a number of mutual funds. According to its
complaint against Canary Capital Partners, LLC, the hedge fund engaged systematically in late trading and
market timing from 1999 to 2003, often with the secret cooperation of
mutual fund management companies or other service providers. The
defendants agreed to make restitution of $30 million in profits, to pay
a $10 million penalty, and to cooperate in Spitzer's ongoing
investigation of the mutual fund industry.
Please click http://www.sec.gov/news/press/2003-106.htm for a copy of the SEC's press release.
Please click http://www.oag.state.ny.us/press/2003/sep/sep03a_03.html for a copy of the Attorney General Spitzer's press release.
