General Counsel to Leave SEC
11.30.2005 Giovanni Prezioso, General Counsel of the SEC, announced today that he will leave the SEC to return to the private sector. Prezioso, 47, was named General Counsel in April 2002. He has not yet accepted another position and will remain at the SEC until early 2006 to assist with transition matters.
During his tenure, the Office of the General Counsel reviewed and provided legal advice to the SEC on over 2000 enforcement actions and over 100 rulemaking proceedings.
His Office was responsible for coordinating the SEC�s successful implementation of the extensive rulemaking requirements of the Sarbanes-Oxley Act of 2002 within the strict timeframes set by Congress. The Office also drafted regulations under the Act that established, for the first time, formal SEC standards of professional conduct for attorneys representing public companies.
Please click http://www.sec.gov/news/press/2005-167.htm to access a copy of the press release.
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New Requirements Relating to Performance Data in Advertisements of 529 College Plans and Other Municipal Fund Securities Are Now Effective
11.30.2005 The Municipal Securities Rulemaking Board (MSRB) adopted Rule G-21, which is now in effect. The rule establishes specific requirements with respect to advertisements by brokers, dealers and municipal securities dealers (�dealers�) relating to 529 college savings plans and other municipal fund securities will become effective. The amendments include requirements regarding (i) the calculation and display of performance data for municipal fund securities, including the use and availability of performance data current to the most recent month-end, and (ii) legends and disclosures required to be included in advertisements containing such performance data. These requirements are consistent with Rule 482 adopted by the SEC under the Securities Act of 1933, as amended, in connection with the advertisement of mutual fund performance. All advertisements of municipal fund securities containing performance data submitted or caused to be submitted for publication by a dealer on or after December 1, 2005 must comply with the amendments.
Please click http://ww1.msrb.org/msrb1/whatsnew/2005-58.asp for a copy of the rulemaking release.
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SEC Proposes Rules That Will Permit Companies to Deliver Proxies Via the Internet
11.29.2005 The SEC proposed a rule that would allow companies and other persons to use the Internet to satisfy proxy material delivery
requirements.
When a person solicits a proxy from the shareholders of a
company that is subject to the proxy rules, Rule
14a-3 under the Securities Exchange Act of 1934 (Exchange Act) currently requires that a proxy statement, which must
include specified disclosure, be delivered with or prior to
that solicitation. Further, when a company solicits proxies,
it also must deliver an annual report to shareholders, which
must include additional specified disclosure. Under current
proxy rules, the proxy statement and annual report must be delivered in paper form or, if the
shareholder consents, they may be delivered electronically
(for example, by e-mail). Because the electronic delivery option
requires affirmative shareholder consent, it currently is used
only on a limited basis.
Under the proposed rules, the company could satisfy its obligation to furnish proxy
materials to shareholders through a �notice and access� model.
The company would post its proxy materials on an Internet Web
site (other than EDGAR) and would send a �Notice of Electronic
Proxy Materials� (the Notice) at least 30 days before the date
of meeting. The Notice would have to contain the following information:
- a prominent legend in bold-face type that advises
shareholders of: (1) the date, time, and location of the
meeting; (2) the electronic availability of the proxy
materials at a specified Web site address; and (3) a toll-free phone number and e-mail address that shareholders may
use to request copies of the proxy materials; and
- a clear and impartial description of the matters to be
considered at the meeting along with the company�s
recommendation regarding those matters.
The Notice would have to be written in plain English and could not include any additional information.
In addition, the following procedural requirements would apply:
- The proxy card would have to be accompanied by, and
delivered through the same medium (paper or electronic) as,
either the Notice or the proxy statement.
- If a shareholder requested a copy of the materials
identified in the Notice, the company would be obligated to
send the materials within two business days.
- Additional soliciting materials that are distributed
after the Notice is sent would have to be posted on the Web
site specified in the Notice.
- For shareholders holding their shares through brokers,
banks, or other intermediaries, the Notice and voting
instruction form would be delivered through the
intermediary. Those shareholders could request copies
through either the company or the intermediary.
Please click http://www.sec.gov/rules/proposed/34-52926.pdf for a copy of the proposal.
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Valuation Issues Results in Hedge Fund Manager Being Barred from Associating with an Investment Adviser
11.29.2005 The SEC barred Joseph W. Daniel from association
with any investment adviser because of issues related to valuation of the hedge fund�s portfolio securities. Daniel was managing partner
of the Critical Infrastructure Fund, a New York-based hedge
fund.
The SEC�s complaint alleged that Daniel was responsible for valuing
private placement investments held in the Fund�s portfolio and
wrote up the value of the Fund�s private placement investments
by over 20%. The complaint further alleges that starting in
at least December 2000, Daniel improperly failed to write down
the value of the private placement investments when those
companies encountered financial difficulties, even when some
declared bankruptcy. As a result, the complaint alleges,
Daniel made misrepresentations to investors about the value of
their investments in the Fund and the Fund�s performance,
allowed certain investors to redeem their shares at inflated
values to the detriment of the remaining investors, and
inflated the management fees paid by investors. In addition,
the Complaint alleges that when new investors invested in the
Fund in December 2001 and January 2002, Daniel made
misrepresentations about the Fund�s assets, performance, and
the percentage of assets the Fund invested in private
placements.
Daniel consented to the investment adviser bar without
admitting or denying the findings in the SEC�s Order.
Please click http://www.sec.gov/litigation/admin/ia-2450.pdf for a copy of the administrative order.
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ICI President Testifies Before Congress About Credit Rating Agencies
11.29.2005 ICI President Paul Stevens testified about H.R. 2990, a bill entitled the "Credit Rating Agency Duopoly Relief Act of 2005." Stevens called for the introduction of competition in the ratings industry through the reform of the SEC's current process for designation of Nationally Recognized Statistical Rating Organizations (NRSROs). He also advocated increased regulatory oversight by the SEC of NRSROs through a combination of periodic filings with the SEC and appropriate inspection by the SEC. He suggested that the SEC require regular and timely disclosure of information about NRSROs to investors. Lastly, he stated that NRSROs should have some accountability for their ratings.
Please click http://www.ici.org/home/05_house_nrsro_tmny.html#TopOfPage to access a copy of the testimony.
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Federated Affiliates Settle Market Timing Charges
11.28.2005 Three affiliates of Federated Investors, one of the nation�s largest mutual fund complexes, have agreed to pay $72 million to settle charges they harmed long-term mutual fund shareholders by allowing undisclosed market timing and late trading by favored clients and an employee. The affiliates were ordered to give up $27 million in ill-gotten gains and pay a $45 million civil penalty, in addition to $8 million they previously paid to the Federated funds that were harmed by the wrongful conduct.
Federated Investment Management Company (FIMC), a registered investment adviser and Federated Securities Corp. (FSC), a registered broker-dealer, committed securities fraud by approving�but not disclosing to Federated funds' shareholders or the funds� Boards of Trustees�three market timing arrangements, or the associated conflict of interest between FIMC and the funds involved in the arrangements. In addition, FSSC allowed a customer and a Federated employee to late trade.
The SEC found that, at the time they entered into the market timing arrangements, FIMC and FSC recognized that certain types of market timing could be generally detrimental to certain of the Federated funds and could, among other things, compromise the investment strategies of portfolio managers and increase costs for long-term shareholders. From January 2003 through July 2003, notwithstanding prospectus disclosure and internal procedures designed to prevent market timing, FIMC and FSC provided approved �timing capacity� in certain mutual funds to Canary Capital Partners LLC, a hedge fund managed by Edward J. Stern, and never disclosed this arrangement to other Federated fund shareholders or the Federated funds� Boards. In return, Canary Capital made a separate investment of non-timed assets, so-called �sticky assets,� in a Federated fund.
Please click http://www.sec.gov/litigation/admin/34-52839.pdf to access a copy of the administrative action.
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CFTC Seeks Input on SRO Proposal
11.21.2005 The Commodity Futures Trading Commission (CFTC) published in the Federal Register a Request for Comments on self-regulation and self-regulatory organizations (SROs) in the U.S. futures industry.
The Request for Comments advances the CFTC�s ongoing review of self-regulation and self-regulatory organizations (SRO Study) through 11 questions that build on recent industry developments, update prior fact-finding by CFTC staff, and offer interested parties an additional opportunity to comment as the SRO Study nears conclusion. It seeks public comment on a range of SRO issues, including governance, the composition of SRO boards of directors and disciplinary committees, and the impact of changing business and ownership models. Commenters are also asked to consider the effectiveness of board-level regulatory oversight committees, the unique role of outside regulatory service providers, and the impact of securities exchanges� listing standards on publicly-traded futures SROs.
The questions presented and issues raised in the Request for Comments will form the basis of a future CFTC roundtable on self-regulation. The Request for Comments will be published for a 45-day comment period.
Please click http://www.cftc.gov/opa/press05/opa5138-05.htm to access a copy of the administrative action.
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NASD Seeks Permanent Bond Rating Rule
11.16.2005 The NASD filed an application with the SEC seeking permanent approval of a pilot rule that went into effect in 2000 allowing firms to use volatility ratings in supplemental sales literature for bond funds. Without approval, the rule will expire this December.
Third-party ratings allow firms to objectively compare their funds' volatility with that of their competitors. That's important because it lets investors gauge the riskiness of the bond funds they�re thinking about buying.
The pilot rule allows fund firms to include that information in supplemental sales literature. Those are materials given to investors along with a prospectus in order to give them more information about a particular mutual fund.
NASD registrants are required to submit mutual fund advertising and sales literature for review within 10 business days of first use. The NASD advertising rules for bond fund sales literature that includes volatility ratings are somewhat tougher, requiring registrants to file at least 10 business days prior to use. Firms must also receive NASD approval before using the material with the public.
One aspect of the rule that the SEC may look at more closely is the timeliness of the ratings. Now, firms including volatility ratings in their materials must use figures that are current to the most recently ended calendar quarter. In its application to the SEC, the NASD recommends that the regulator seek comment on whether or not firms should use even more current ratings.
Please click http://www.sec.gov/rules/sro/nasd/34-52709.pdf to access a copy of the release announcing the action involving the rule.
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SEC Commissioner Atkins Speaks at ABA Meeting
11.11.2005 SEC Commissioner Paul Atkins spoke before the ABA Legislative and Regulatory Subcommittee of the Committee on Banking Law, on the independent directors� rule. Atkins was highly critical of the rulemaking process by which this rule was adopted, and then re-adopted on remand from the U.S. Appeals Court. Atkins denounced the haste with which the rule was re-adopted, describing it as �superficial� and �the bare minimum necessary to survive further appellate review� by the Appeals Court.
Commissioner Atkins singled out the SEC�s General Counsel for criticism, for acting on behalf of the SEC without regard for the actual views of the current SEC. (Two of the three Commissioners who voted for the independent directors� rule have since left the SEC.) He also criticized the General Counsel for submitting briefs to the Appeals Court independently, without reviewing them with the Commission members ahead of time.
Overall, according to Commissioner Atkins, the independent directors� rule demonstrates the SEC�s �backwards� approach to rulemaking during the past few years, in which the SEC determines what the rule should be, then conducts ��analysis� to �demonstrate� that its costs are low and its alternatives inferior.� Atkins also criticized the new hedge funds rule on similar grounds.
Please click http://www.sec.gov/news/speech/spch111105psa.htm to access a copy of the speech.
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OCIE Associate Director Speaks at Fund of Funds Conference
11.11.2005 Gene Gohlke spoke about conflicts of interest at the Fund of Funds Conference held in New York. He stated that there are only two ways in which advisers can handle their conflicts of interest and remain within an acceptable level of regulatory compliance:
- Eliminate the arrangements or activities that create the conflict; and
- Disclose each conflict fully and fairly and then manage the adviser's affairs so impact of a conflict on clients and fund investors will be consistent with the disclosures made.
He advised advisers to ought to devote considerable attention to identifying, disclosing and managing their conflicts of interest if they want to be in business for the long term.
He also reviewed the various types of OCIE exams:
Cause exams. These are exams triggered by complaints, tips, media reports and output of our risk assessment processes that identify specific advisers or funds that have a high probability of problematic activities such as making misleading disclosures, using false performance information to lure clients, stealing investment opportunities from clients or outright theft of clients' assets. Conducting these exams has the highest priority and the focus of these exams is on the questionable conduct that led the SEC to the firm.
Routine exams. Exam staff divides the population of registered advisers into two groups; those with high and low risk profiles and conduct routine exams of firms in each group.
He further stated that firms are rated as high risk based on three criteria:
- Amount of assets under management,
- Responses in Form ADV, and
- Existence of a weak compliance environment.
With respect to fund of funds, he suggested the following procedures:
- Fund of funds will only invest in underlying funds that give portfolio transparency.
- Fund of funds will only invest in underlying funds whose financial statements are audited by an accounting firm active in the hedge fund industry.
- Fund of funds will only invest in underlying funds that use an independent administrator to value holdings and calculate NAV.
- Fair value procedures are to be adopted by and can only be changed with approval of the fund's governing body or entity.
- Fair value procedures provide guidance on when they are to be used.
- NAVs reported by underlying funds are compared to summary information contained in audited financial statements and tax reporting forms provided by underlying funds and discrepancies are followed up and resolved.
- Monthly performance and change in NAV of each underlying fund is analyzed in the context of expectations of what performance of the underlying fund should be in light of each fund's objectives and sector investments and market returns in those sectors during the month.
- Differences between NAVs of underlying funds used to calculate fund of funds NAV and realized NAVs used to price interests in underlying funds which are redeemed are analyzed to determine if, over time, patterns of over or under valuation are evident.
- Regular testing is conducted of differences between fair values used in place of actual NAVs for underlying funds and subsequent NAVs reported by underlying funds to determine if, over time, patterns of over or under valuation are evident which may require changes in fund of funds fair value procedures.
- Over longer periods of time, actual returns in market sectors in which underlying funds are invested are compared to changes in NAV reported by such underlying funds and to the reported performance of the fund of funds to look for discrepancies that may be indicative of valuation issues by either underlying funds or the fund of funds.
Please click http://www.sec.gov/news/speech/spch111405gag.htm for a copy of the speech.
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New LM-10 Requirements Applicable to Service Providers to Unions and Affiliated Plans
11.10.2005 The Department of Labor released guidance on the filing requirements of the Labor-Management Reporting and Disclosure Act of 1959 (�LMRDA�) as it relates to service providers to unions and union-affiliated plans. The guidance is in the form of 26 lengthy Q&A�s posted on DOL�s website is effective for fiscal years beginning on or after January 1, 2005.
The guidance was issued on a retroactive basis and without opportunity for notice and comment despite requests by financial services associations that any filing obligations for service providers to employee benefit plans be imposed only prospectively after opportunity to address industry concerns. DOL has attempted to address some industry concerns through an expanded de minimis exemption and allowing reports to be filed for 2005 without penalty of perjury under certain circumstances.
The LM-10 is required to be filed within 90 days after the end of a fiscal year, which means that covered entities with a calendar fiscal year will be required to file, by March 31, 2006, an LM-10 covering payments made during the fiscal year that began on January 1, 2005. Although certain relief is provided as to the substance of the filing to be made in 2006 for the 2005 fiscal year, no relief is provided as to the filing deadline.
DOL takes the position that this guidance clarifies filing requirements that have always existed. The guidance states that under a special enforcement policy, new filers will not be required to submit reports or maintain records for fiscal years beginning prior to January 1, 2005 except in �extraordinary circumstances� such as evidence of egregious conflicts of interest or outright attempts to purchase official favors.
Please click www.dol.gov/esa/regs/compliance/olms/LM10_FAQ.htm to access information about the DOL action.
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SEC Chairman Cox Issues Statement to CCOs
11.2.2005 Christopher Cox, the Chairman of the SEC, issued the following statements to CCOs at the CCOutreach National Seminar in Washington, D.C.:
"The CCOutreach National Seminar is a marvelous opportunity for the SEC to show our support for the important work that chief compliance officers perform on behalf of mutual fund investors and advisory clients. The National Seminar will be an unprecedented gathering of both CCOs and SEC staff. It will be a chance for us to discuss the compliance issues CCOs face on a daily basis. Each of the Seminar�s panels will feature senior-level SEC staff, as well as CCOs from both large and small firms. It is my hope that the Seminar�s panels will stimulate a thoughtful dialogue. We will all benefit from a healthy exchange of ideas, and I hope the discussions will reinforce CCOs� strong commitment to serve investors.
The SEC�s desire to host this Seminar underscores the respect and admiration we have for the critical compliance functions that CCOs perform. CCOs are the cornerstone of the investment management compliance framework. America�s investors need the passion, expertise, and determination that CCOs bring to their jobs. As regulators, our job � and the goal of the National Seminar � is to help CCOs to succeed."
Please click http://www.sec.gov/litigation/litreleases/lr19427.htm to access a copy of the administrative order.
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