SEC INVESTMENT MANAGEMENT DIRECTOR SPEAKS ON CURRENT ADVISER ISSUES
1.28.2004 Paul Roye, the Director of the SEC�s Division of Investment Management, spoke at the ALI-ABA Course of Study Investment Adviser Regulation in Washington, D.C. about number of regulatory initiatives under the Investment Advisers Act that make, or propose to make, significant changes in the regulatory landscape.
Highlights of the speech are:
- Reasons why the SEC concluded that hedge fund adviser registration was necessary;
- What broker-dealer activities trigger regulation under the Investment Advisers Act, including a discussion of the new proposal that would substantially expand the required disclosures to address any confusion that exists regarding differences between brokerage and advisory accounts;
- Review of the status of thrift institutions under the Advisers Act, and the SEC's proposal to except thrifts from the Advisers Act when they provide investment advice in their capacity as a trustee, executor, administrator, or guardian for trusts, estates, guardianships and other fiduciary accounts;
- How advisory firms can enhance compliance and internal controls;
- New adviser Code of Ethics rule;
- New IA Task force that will develop risk assessment protocols which could be used to identify investment advisers whose activities are raising �red flags� that suggest a more focused, cause inspection may be in order; and
- Form ADV Part II update, with the expectation that the SEC will adopt the new Part II "in the coming months."
Please click http://www.sec.gov/news/speech/spch012805pfr.htm for a copy of the speech.
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MORGAN STANLEY AND GOLDMAN SACHS SETTLE IPO ALLOCATION CASE
1.22.2004 Morgan Stanley & Co. Incorporated and the SEC settled a case relating to the firm�s allocation of stock to institutional customers in initial public offerings (IPOs) it underwrote during 1999 and 2000. The SEC alleged that Morgan Stanley violated
Rule 101 of Regulation M under the Securities Exchange Act of 1934 by
attempting to induce certain customers who received allocations of IPOs
to place purchase orders for additional shares in the aftermarket. The
complaint further alleges that Morgan Stanley induced certain
customers to place such orders during the new issues� first few trading
days.
Goldman Sachs reached a settlement with the SEC on similar charges. According to the SEC's complaint, Goldman Sachs, during restricted periods,
attempted to induce, or induced, certain customers to make
aftermarket purchases of IPO stock in violation of Rule 101 of
Regulation M by engaging in the following activities:
- Goldman Sachs
communicated to certain customers that Goldman Sachs considered
purchases in the immediate aftermarket to be significant in the
determination of IPO allocations;
- Goldman Sachs informed certain
customers that Goldman Sachs verified whether customers placed orders to
purchase stock in the immediate aftermarket following an IPO;
- During
conversations or courses of dealing that included the preceding
subjects, Goldman Sachs sales representatives asked certain customers
during restricted periods whether, and at what prices and in what
quantities, they intended to place orders to purchase IPO stock in the
immediate aftermarket;
- Goldman Sachs encouraged certain customers that
had provided �aftermarket interest� (expressions of interest in buying
shares in the aftermarket) to increase the prices they said that they
would pay in the aftermarket.
- Goldman Sachs sought and/or accepted
aftermarket interest from customers based solely or in relevant part on
the amount of their prospective allocations.
Please click http://www.sec.gov/litigation/litreleases/lr19050.htm for the Morgan Stanley administrative order.
Please click http://www.sec.gov/litigation/litreleases/lr19051.htm for the Goldman Sachs administrative order.
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SEC INVESTMENT MANAGEMENT DIRECTOR SPEAKS ON HEDGE FUND ADVISER REGISTRATION
1.12.2005 Paul Roye, the Director of the SEC�s Division of Investment Management, spoke at the Managed Funds Association Educational Seminar Series 2005 in New York City about the SEC's new regulatory framework for hedge fund advisers.
Highlights of the speech are:
- Statement that there were no no justification for direct regulation of hedge funds themselves under the Investment Company Act of 1940;
- New rules will not place limits on legitimate trading techniques or strategies;
- Hedge fund adviser registration is "not the SEC's first step down a slippery slope" toward more comprehensive regulation of hedge fund activities;
- Review of the steps hedge fund advisers will have to take to register via the IARD;
- Hedge fund advisers must develop compliance policies and procedures, adopt a code of ethics and designate a chief compliance officer; and
- SEC's coordination with the CFTC on the regualtion of hedge fund advisers.
Please click http://www.sec.gov/news/speech/spch011205pfr.htm for a copy of the speech.
REGISTERED REPS SETTLE MARKET-TIMING AND LATE-TRADING CHARGES
1.11.2005 Lawrence S. Powell and Delano N. Sta.Ana, formerly associated as registered
representatives at Kaplan & Co. Securities, Inc., a Boca Raton-based
broker-dealer and investment adviser, settled charges of improper market timing and late trading.
The SEC had alleged that Powell and Sta.Ana used various devices to hide the identities of their customers from mutual
funds to allow fraudulent market timing (short-term trading to exploit
pricing inefficiencies) in those mutual funds, and engaged in late trading
mutual fund shares on behalf of their market timing customers.
The SEC made the following factual findings regarding Powell and Sta.Ana:
- they used multiple registered representative numbers to evade
detection by the mutual funds and fraudulently conceal the identities of
Kaplan & Co. registered representatives from mutual funds;
- they used multiple branch codes to hide the identity of the
Kaplan & Co. Florida branch as the originating branch of the transactions.
- they facilitated fraudulent market timing activities by
establishing relationships with multiple clearing firms.
- they effected mutual fund trades for orders received after 4:00
p.m. ET, allowing their customers to receive the same-day net asset value
pricing on those trades (as though the orders were received prior to the 4:00
p.m. ET stock market close). This system allowed Kaplan & Co.�s customers to
capitalize on news events or market changes occurring after the 4:00 p.m. ET
stock market close; and
- They engaged in the �next-day busting� of orders. On
numerous occasions, certain mutual fund group effected trades for
customers and then contacted the clearing firm the following morning to take
steps to cancel or �bust� the trade. In some instances, the mutual fund
group falsely told the clearing firm that the order had been �erroneously
entered,� when in fact, the timing customer had simply changed its mind about
placing the order.
The SEC�s Order finds that Powell and Sta.Ana willfully violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, and willfully aided and abetted and caused Kaplan & Co.�s
violations of Section 15(c)(1) of the Exchange Act and Rule 22c-1
promulgated under Section 22(c) of the Investment Company Act of 1940.
Please click http://www.sec.gov/litigation/admin/34-51017.htm for the administrative order.
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CFTC BRINGS ACTION AGAINST HEDGE FUNDS AND TRADERS INVOLVING OPTIONS
1.11.2005 The CFTC filed suit against United Investors Group, Inc. (UIG), and traders Greg P. Allotta, and Michael H. Savitsky III, all of Boca Raton, Florida; Jay M. Levy of Aventura, Florida; Paul F. Plunkett, UIG principal and chief executive officer, of Deerfield, Florida; and Andrew D. Ross, former UIG principal and director, of Boca Raton. The complaint alleges that, beginning in August 2003, UIG and several of its traders, including Allotta, Levy, and Savitsky fraudulently solicited customers to open accounts to trade options through UIG by combining high-pressure sales tactics with fraudulent misrepresentations about the likelihood of profits, the level of risk involved in trading options, and their purported success in trading. The complaint further alleges that, from August 2003 to June 2004, approximately 98 percent of the 364 accounts opened at UIG lost money trading commodity options -- for a total loss of more than $6.1 million -- while, for the same time period, UIG charged more than $4.25 million in commissions and fees.
The complaint also names Greg Allotta Enterprises, Inc., and Michael Savitsky, Inc., as relief defendants. Relief defendants are not charged with violations of the law, but they are named solely as persons who may have received funds from a fraudulent scheme. The complaint alleges that Greg Allotta Enterprises and Michael Savitsky, Inc., received commission payments based on the fraudulent conduct of Allotta and Savitsky, respectively.
Please click http://www.cftc.gov/opa/adv05/opawa02-05.htm to access the administrative action.
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SEC ADOPTS TEMPORARY RULE EXEMPTING BROKER-DEALERS OFFERING CERTAIN TYPES OF PROGRAMS FROM REGISTRATION AS INVESTMENT ADVISERS
1.7.2005 The SEC adopted temporary Rule 202(a)11-1
under the Investment Advisers Act of 1940 that addresses
the application of the Advisers Act to broker-dealers offering certain
types of brokerage programs. Under the rule, a broker-dealer providing
nondiscretionary advice that is solely incidental to its brokerage
services is excepted from the Advisers Act regardless of whether it
charges an asset-based or fixed fee (rather than commissions, mark-ups,
or mark-downs) for its services. The temporary rule further provides that
broker-dealers are not subject to the Advisers Act solely because they
offer full-service brokerage and discount brokerage services, including
execution-only brokerage, for reduced commission rates.
At the same time the SEC adopted the temporary rule, it proposed a rule that would make permanent the provisions in the temporary rule. The proposed rule, if adopted, would also:
- Substantially expand the required disclosures to address any confusion that exists regarding differences between brokerage and advisory accounts;and
- Require that all advertisements for an account excepted under the rule and all agreements, contracts, applications and other forms governing the operation of such an account contain a prominent statement that it is a brokerage account and not an advisory account, and that, as a consequence, the investor�s rights and the firms� duties and obligations to the investor, including the scope of the firm�s fiduciary obligations, may differ and that an appropriate person at the firm be identified with whom the customer can discuss these differences.
The SEC in the rule proposal release also requested comment on a requirement that broker-dealers treat as advisory accounts all accounts for which they provide discretionary advice, without regard to the form of compensation. This interpretation would provide a bright line test for the availability of the broker-dealer exception based on the exercise of discretion as a reliable indicator of the services the Advisers Act was intended to reach.
The SEC noted that it would issue a
statement of interpretive position that would clarify when certain
broker-dealer advisory services, including financial planning, are
solely incidental to brokerage business.
The temporary rule will expire on April 15, 2005, when the SEC is expected to adopt a permanent rule.
Please click http://www.sec.gov/rules/final/34-50979.htm for the release adopting the temporary rule.
Please click http://www.sec.gov/rules/proposed/34-50980.pdf for the release proposing the final rule.
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