IM Director Testifies Before Congress About Senior Issues
10.30.2007 Andrew Donohue, Director of the SEC's Division of Investment Management, testified on "Improving Disclosure for Workers Investing for Retirement" before the House Ways and Means Committee. He stated that last year the SEC launched a "Seniors Initiative" to address senior issues from a number of angles -- from investor education, to targeted examinations, to aggressive enforcement efforts. The hallmarks of this initiative according to Mr. Donohue have been partnerships with other agencies such as the Department of Labor, which assists us in connection with our ongoing examination of the adequacy of disclosures available to investors concerning mutual funds and other investment vehicles.
He also testified about the SEC examining ways to reform the mutual fund disclosure framework. The goal of this examination is to find the best way to get investors a concise summary document containing key information about a fund described in plain English and in a standardized order. The key information contained in a concise mutual fund summary potentially could include a fund's fees and investment objectives and strategies, risks, and performance.
Please click http://www.sec.gov/news/testimony/2007/ts103007ajd.htm for a copy of his testimony.
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IM Director Speaks at Separately Managed Accounts Conference
10.19.2007 Andrew Donohue, Director of the SEC's Division of Investment Management, spoke at the 2007 Managed Accounts Solutions Conference in New York. He began his speech by reviewing statistics. Based on data from the SEC's IARD system, as of September 30, 2007 there were 10,817 investment advisers registered with the SEC. Of these, 486 advisers (4.5%) indicated that they sponsor a wrap fee program and 1,110 advisers (over 10%) indicated that they act as a portfolio manager for a wrap fee program.
He reviewed the SEC's principal trading rulemaking that responds to the decision by the Court of Appeals for the DC Circuit in Financial Planning Association v. SEC. He stated that new rule 206(3)-3T permits an adviser that also is a registered broker-dealer to give oral disclosure prior to each principal trade rather than the written disclosure otherwise required by section 206(3). The rule applies only to non-discretionary accounts -- where there already is client involvement in every transaction.
He mentioned that the RAND Corporation is conducting a study of the issue of the roles that investment advisers and broker dealers play in the retail financial services market. Following the Financial Planning Association v. SEC decision, Mr. Donohue stated that Chairman Cox approved additional emergency funding to accelerate this study so that it will be delivered to the SEC no later than December of this year, which is several months ahead of schedule.
Other topics addressed were Form ADV, Part 2, SMA trade execution and Rule 3a-4 under the Investment Company Act of 1940 (the inadvertent investment company rule). With respect to Rule 3a-4, Mr. Donohue stated that it was important that the SEC periodically review the conditions in the rule to consider whether they provide for an appropriate level of individualized treatment to support an exception from the definition of investment company for certain types of managed accounts or investment advisory programs.
Please click
http://www.sec.gov/news/speech/2007/spch101907ajd.htm for a copy of his speech.
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OCIE Director Speaks on the Culture of Compliance
10.18.2007 Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, spoke at the National Society of Compliance Professionals 2007 National Membership Meeting in Washington, D.C. She began by saying that she is pleased to see recently that more compliance conferences are focusing attention on the process of compliance, and not just on specific legal obligations. She speculated that this is due to an increasing appreciation of the fact that compliance plays an operational role and has a toolkit that is different from that used by lawyers in a firm's legal department. She noted that the operational aspect of compliance is the essence of our CCOutreach program at the SEC, which is designed to provide a forum for compliance professionals and the SEC staff to communicate about compliance practices that are effective, and ultimately, to strengthen industry compliance for the protection of investors.
Ms. Richards defined "culture of compliance" as instilling in every employee an obligation to do what's right. In her view, this culture must underpin all that the firm does, and must be part of the essential ethos of the firm, so that when employees make decisions, large and small, and regardless of who's in the room when they make them, and whether or not lawyers or regulators or clients or anyone else is looking, they are guided by a culture that reinforces doing what's right. Importantly, a firm's Culture of Compliance exists outside the compliance department -- it exists throughout the firm.
She further stated that that firms can technically have all the elements of a compliance program -- the policies, the procedures, the training -- but not actually have an effective compliance program. In measuring the effectiveness of compliance programs, Ms. Richards strongly suggests that CCOs think about measurements that include not just output, but that also include outcomes. That is, that the CCO should not just measure the number of new surveillance reports, new training programs, new guidance provided to firm employees, but also seek to measure the reduction or elimination of violations.
Please click http://www.sec.gov/news/speech/2007/spch101807lar.htm to access a copy of her speech.
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New York Hedge Fund and Hedge Fund Adviser Charged with Violating Short Sale Rules
10.15.2007 In an administrative action, the SEC charged a New York hedge fund, its adviser, and its managing director with illegal trading in connection with at least eighteen public offerings. The SEC alleged that Colonial Fund LLC, Colonial Investment Management LLC, and Cary G. Brody violated Rule 105 of Regulation M under the Securities Exchange Act of 1934 when they used shares purchased in at least eighteen registered public offerings to cover short sales that they made during a restricted period.
In general, Rule 105 seeks to prevent manipulative trading by short sellers prior to registered public offerings and to promote offering prices that are based upon open market prices, determined by supply and demand, rather than by artificial forces. At the time of the alleged violations, Rule 105 generally prohibited short sellers, regardless of intent, from using securities purchased in registered public offerings to cover short sales that occurred during the five business days before the pricing of the offerings (the restricted period). The Colonia Fund realized profits from their illegal trading because it typically sold shares short during the restricted period at prices that were higher than what it would pay a short time later when it purchased shares in the registered public offerings.
The SEC also alleged that, in an effort to conceal their illegal trading, Colonial Fund often engaged in sham market trades after covering Colonial Fund's restricted period short positions. For example, Colonial Fund, after covering, entered riskless cross trades to buy and sell the same quantity of shares, at the same price, and from the same broker. According to the SEC, Brody, acting through Colonial Investment, directed, authorized, supervised, and profited from the illegal trading alleged in the complaint.
Please click
http://www.sec.gov/litigation/litreleases/2007/lr20332.htm for a copy of the administrative order.
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Hedge Fund Adviser Charged with Short Sale Violation Related to Hurricane Katrina
10.10.2007 The SEC has charged a New York hedge fund adviser with short sale violations in connection with the Hibernia-Capital One merger. The SEC settled the enforcement action against Sandell Asset Management Corp. (SAM), its chief executive officer, and two other employees for engaging in improper short sales in connection with trading in the securities of Hibernia Corporation in the immediate aftermath of Hurricane Katrina.
Hibernia was a New Orleans-based bank holding company and the subject of an acquisition agreement with Capital One Financial Corporation at the time Katrina occurred. As part of its merger arbitrage investment strategy, SAM held a large long position in Hibernia. According to the SEC, SAM personnel believed that Capital One would lower its offering price for Hibernia shares in the wake of Katrina. In an attempt to offset an anticipated loss to a client, SAM personnel began to sell short as many shares of Hibernia stock as possible, improperly marking certain sales orders as "long" or misrepresenting to the broker-dealers executing some of the trades that they had located stock to borrow.
After the Hibernia-Capital One merger was announced on March 6, 2005, SAM according to the SEC purchased approximately 9.3 million shares of Hibernia stock for one of the firm's hedge fund clients. Thereafter, SAM sold the Hibernia shares to third parties and entered into "swap" transactions with them. The hedge fund managed by SAM no longer owned the Hibernia shares, but retained all of the economic risk of loss if the price of the shares declined.
On August 29, 2005, Hurricane Katrina struck New Orleans, where Hibernia was headquartered and maintained substantial assets. On August 31, 2005, in its effort to offset a potential loss to its client, SAM personnel improperly marked certain sales orders as "long" even though they were, in fact, short. On September 2, 2005, SAM personnel made some additional short sales by representing to the broker-dealers executing the trades that they had located stock to borrow, when in fact they had not. The SEC found that the August 31 trades violated Section 10(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 10a-1 and that the September 2 trades violated Section 17(a)(2) of the Securities Act of 1933.
Please click http://www.sec.gov/litigation/admin/2007/33-8857.pdf to access a copy of the administrative order.
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Adviser CCO Found to Aid and Abet Securities Law Violation
10.4.2007 The SEC charged Consulting Services Group, LLC (CSG), a Memphis, Tennessee-based registered investment adviser, with failing to adopt a compliant investment adviser code of ethics by February 1, 2005, in violation of Section 204 of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 204A-1. The SEC further found that Joe D. Meals (Meals), CSG's chief compliance officer, instructed CSG's supervised persons to backdate the written acknowledgment forms required under Advisers Act Rule 204A-1 so as to indicate falsely that CSG had timely complied with the ethics code provisions of Advisers Act Rule 204A-1. In June of 2005, the SEC staff requested that CSG provide to the SEC staff the written acknowledgment forms executed by CSG's supervised persons. In response to the SEC staff's request, Meals again instructed certain CSG supervised persons to backdate their written acknowledgment forms, CSG then produced all such backdated written acknowledgment forms to the SEC staff.
The SEC found that by failing to adopt timely a code of ethics compliant with Rule 204A-1 and by failing to maintain accurate written acknowledgments by all supervised persons of their receipt of a code of ethics compliant with Rule 204A-1, CSG willfully violated Advisers Act Section 204 and Rule 204-2 thereunder and Rule 204A-1 and Meals willfully aided and abetted and caused such violations.
The SEC further found that CSG failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the Rules thereunder by its supervised persons, in violation of Advisers Act Section 206(4) and Rule 206(4)-7 thereunder. In adopting Rule 206(4)-7, the SEC described a flexible approach that could be taken by investment advisers, stressing that there was no single set of universally applicable required elements for an investment adviser's policies and procedures, and that instead each adviser should adopt policies and procedures that take into consideration the nature of that firm's operations. The SEC further stated that firms should first identify conflicts and other compliance factors creating risk exposure for the firm and its clients in light of the firm's particular operations, and then design policies and procedures that address those risks. See Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (December 24, 2003).
The SEC further found that in September 2003, in an effort to comply with Advisers Act Rule 206(4)-7, Meals purchased for CSG an Investment Advisers Policies and Procedures Manual template from a compliance outsourcing firm. Meals combined the 2003 policies and procedures template with a similar set of pre-packaged policies and procedures from 1990 to serve as CSG's written policies and procedures. The pre-packaged policies and procedures manual and template that Meals purchased for CSG in 1990 and 2003 was, however, designed for use by investment advisers offering discretionary money management services to clients - and was not designed for use by institutional or pension consultants. The pre-packaged policies and procedures manual and template failed to address adequately the conflicts of interest unique to CSG's operations as a pension consultant, and many of the sections within these generic forms were completely inapplicable and irrelevant to CSG's provision of advisory services to clients. The SEC found therefore that by failing to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by its supervised persons, CSG willfully violated Advisers Act Section 206(4) and Rule 206(4)-7 thereunder and according to the SEC, Meals willfully aided and abetted and caused such violations. The SEC censured CSG and Meals; ordered that CSG and Meals cease and desist from committing or causing any violations and any future violations of Sections 204 and 206(4) of the Advisers Act and Rule 204-2(a)(12), 204A-1(a)(5) and 206(4)-7 thereunder; ordered CSG to pay a $20,000 civil monetary penalty; ordered Meals to pay a $10,000 civil monetary penalty; and barred Meals from association in a compliance capacity with any broker, dealer or investment adviser.
Please click http://www.sec.gov/litigation/admin/2007/34-56612.pdf to access a copy of the administrative action.
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Commissioner Nazareth to Leave SEC
10.2.2007 Commissioner Annette L. Nazareth announced her intention to leave the SEC to return to the private sector. She spent nine years at the SEC, as both a Commissioner and previously as Director of the SEC's Division of Market Regulation.
The SEC adopted a number of significant reforms during her tenure. In particular, Ms. Nazareth played a key role in the SEC's efforts to modernize its national market system rules. The SEC's new rules recognized the transformation of securities markets from primarily floor-based environments to more fully electronic venues and created a level playing field with greater competition among markets of varying models and better pricing for investors.
Prior to joining the SEC, Ms. Nazareth held several positions in the financial services industry, including positions at Smith Barney, Lehman Brothers and Mabon Nugent. She began her career as an attorney at Davis Polk & Wardwell. She is a graduate of Brown University and Columbia University School of Law.
Ms. Nazareth has not set a date for her departure from the SEC, but has notified President Bush that she does not wish to be re-nominated. Her term ended on June 5, 2007, but Commissioners may remain in their positions for up to 18 months beyond a term's end, unless a successor is appointed sooner.
Please click http://www.sec.gov/news/press/2007/2007-210.htm to access a for a copy of the press release about her departure.
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