SEC Proposes Further Amendments to the Mutual Fund Redemption Fee Rule
2.28.2006 The SEC issued a release proposing amendments to Rule 22c-2 under the Investment Company Act of 1940. The rule was originally adopted by the SEC in 2005. It requires most mutual funds to enter into agreements with intermediaries (such as broker-dealers) that hold shares on behalf of other investors in so called "omnibus accounts." Omnibus accounts represent a variety of challenges for fund firms� efforts to thwart market-timing activities. The accounts basically batch together individual shareholders� trade orders. As a result, fund firms have limited information on the underlying activities of shareholders that purchase fund shares through the platforms.
The agreements must provide the funds access to information about transactions in these accounts to enable the funds to enforce restrictions on market timing and other abusive transactions. The compliance date of the rule is October 16, 2006.
The amendments to Rule 22c-2 would clarify the operation of the rule and reduce the number of intermediaries with which funds must negotiate information-sharing agreements. The amendments are designed to address issues that came to the attention of the SEC after it adopted the rule.
Comments on the proposed amendments are due by April 10, 2006.
Please click http://www.sec.gov/rules/proposed/ic-27255.pdf to access a copy of the proposed rule.
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Commissioner Atkins Speaks at Investment Adviser Conference
2.28.2006 SEC Commissioner Paul Atkins spoke at the Eighth Annual Investment Adviser Compliance Summit in Washington, D.C. about the importance of risk-based approach to compliance in the advisory industry. With respect to the new hedge fund adviser registration rule, he stated that the SEC is discovering that it is no small task to refocus a portion of its examination staff so that they can effectively inspect hedge funds. He noted that the SEC is not as familiar with many aspects of the hedge fund industry, including intricate holding structures, more trades, use of leverage, structured products, and valuation issues.
He also spoke about:
- Adviser chief compliance officers;
- Costs of regulation;
- The SEC�s adviser/broker-dealer registration; and
- SEC sweep exams.
Please click http://www.sec.gov/news/speech/spch022806psa.htm for a copy of the speech.
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SEC Issues Q&A for 529 Plans
2.28.2006 The SEC issued a question-and-answer release on 529 plans. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. Some of the topics include:
- differences between pre-paid tuition plans and college savings plans;
- how investing in a 529 plan affect federal and state income taxes;
- fees and expenses paid when investing in 529 plan;
- restrictions that apply to 529 plan; and
- sources of information about 529 plans.
Please click http://www.sec.gov/investor/pubs/intro529.htm to access a copy of the Q&A.
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Georgia Hedge Funds Charged with Fraud
2.27.2006 The SEC filed a complaint and an emergency application for a temporary restraining order and other relief in the U.S. District Court (Northern District of Georgia) to halt an ongoing fraud involving the sale of investments in seven hedge funds by Kirk S. Wright (Wright); International Management Associates, LLC (IMA) and International Management Associates Advisory Group, LLC (IMA Advisory) and seven hedge funds. IMA and IMA Advisory are investment advisers in Atlanta, Georgia, owned and operated by Wright and others.
The SEC alleges that from February 1997 to the present, approximately $115 million, and as much as $185 million, was raised from up to 500 investors through the fraudulent investment scheme. IMA and IMA Advisory, through Wright, have been providing investors with quarterly statements that misrepresented both the amount of assets in the respective funds and the rates of return obtained by them. By 2005, the assets of the funds, according to the SEC, had been largely dissipated, and this fact was not disclosed to the investors of the funds. The complaint further alleges that Wright produced for certain investors account statements purportedly from a securities broker-dealer showing over $155 million in securities in four accounts for August, 2005, when in fact the first three accounts did not exist. The complaint also alleges that account statements and summaries which Wright displayed to an investor's representative reflecting the balances of certain funds were fabricated and reflected assets that the funds did not possess at that time.
The U.S. District Court entered an TRO restraining the defendants from future violations of the securities laws. The order also appointed a receiver and provides for expedited discovery and prohibits destruction of documents.
Please click http://www.sec.gov/litigation/litreleases/lr19581.htm for a copy of the administrative order.
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OCIE Director Speaks at Investment Adviser Conference About Fiduciary Duties
2.27.2006 OCIE Director Lori Richards spoke at the Eighth Annual Investment Adviser Compliance Summit in Washington, D.C. about fiduciary duties. After discussing the fiduciary duty an investment adviser owes to its clients, she stated that an adviser has the following five major responsibilities when it comes to clients:
- to put clients' interests first;
- to act with utmost good faith;
- to provide full and fair disclosure of all material facts;
- not to mislead clients; and
- to expose all conflicts of interest to clients.
She then listed the most common deficiencies found by OCIE examiners in exams:
- Deficient disclosure;
- Deficiencies in portfolio management;
- Deficiencies with respect to advisory employees' personal trading;
- Deficiencies in performance calculations; and
- Deficiencies in brokerage arrangements and execution.
She then discussed each of these deficiencies.
Please click http://www.sec.gov/news/speech/spch022706lar.htm for a copy of the speech.
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Adviser Charged in Connection with an Asset Allocation Program
2.21.2006 The SEC brought an administrative action against New England Securities Corp. (NES). NES marketed and sold the Investment Manager Program (IM Program), an investment advisory product that allowed investors to select a model asset allocation portfolio of investments. From the program's inception, NES represented to participating clients that it would regularly screen their accounts and identify whether their asset allocation percentages remained within certain predetermined ranges. If the percentages drifted from those ranges, NES represented that it would notify the clients and rebalance their portfolios upon request. The SEC found that from the program's inception and continuing until late 2002, NES failed to provide such rebalancing services to a large number of its IM Program clients.
In separate orders, the SEC also settled administrative cease-and-desist proceedings against the company's former president, Thomas McConnell, and the company's former vice president of product origination, Jonathan Rozek, for their role in the conduct.
In the settlement agreement, NES consented to an order that: (i) censures NES; (ii) requires NES to cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Investment Advisers Act of 1940; and (iii) orders NES to pay $2,042,865 plus prejudgment interest in the amount of $572,000. According to the order, NES self-reported to the SEC's staff its failure to provide rebalancing services to IM Program clients, and fully cooperated with the investigation. In determining to accept NES' offer of settlement, which does not include the imposition of a penalty, the SEC also considered NES' remedial efforts, including restitution to the affected clients and the retention of a major accounting firm to review the company's practices.
Please click http://www.sec.gov/litigation/admin/ia-2489.pdf for a copy of the administrative action.
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CFTC Proposes New Electronic Filing Rules for CPOs
2.17.2006 The CFTC proposes to amend regulations to require that commodity pool annual financial reports submitted by commodity pool operators (��CPOs��) to the National Futures Association (��NFA��) be filed electronically. Further, the CFTC proposed additional amendments to clarify certain aspects of its regulations applicable to CPOs with respect to financial reporting:
- Commodity pool monthly and/or quarterly account statements distributed to participants would have to be prepared in accordance with generally accepted accounting principles (GAAP);
- CPOs would have to file a notification of a change in a public accountant for a commodity pool with the CFTC and with NFA;
- ��segregation�� with respect to a statement required to be made in an accountant�s letter would be clarified to refer to the prohibition on commingling of funds of a commodity pool with the assets of any other person; and
- notifications concerning CPOs� election of fiscal years for commodity pools other than the calendar year or changes in fiscal year would be filed solely with NFA and not the CFTC.
Please click http://www.cftc.gov/files/foia/fedreg05/foi051215a.pdf to access a copy of the release.
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SEC General Counsel Speaks Before Mutual Fund Directors
2.15.2006 Brian Cartwright, the SEC�s General Counsel, spoke at the Mutual Fund�s Directors Forum in Washington, D.C. He reviewed the latest statistics on the mutual fund industry. He stated that independent directors are the centerpiece of the mutual fund regulatory regime. He noted that directors are charged with monitoring conflicts of interest, overseeing management and representing shareholders.
He also spoke about mutual fund disclosure issues. He mentioned several proposed SEC initiatives in this area, including prospectus reform. He mentioned new approaches to facilitate disclosure, including the use of interactive information and taxonomy.
Please click http://www.sec.gov/news/speech/spch021506bgc.htm for a copy of the speech.
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Transcript of CFTC Hearing on SRO Regulation Released
2.15.2006 The CFTC held a hearing to discuss issues related to self-regulation and self-regulatory organizations (SROs) in the U.S. futures industry. Reuben Jeffrey The Chairman of the CFTC opened the hearing by stating that regulation of commodities and futures is premised on the notion that the industry is uniquely situated to define, monitor, and enforce rules of conduct governing its members.
Topics discussed at the hearing included:
- How should SROs� boards of directors be structured to effectively address potential conflicts of interest in self-regulation?
- How can SROs effectively insulate their regulatory functions from commercial considerations and influence?
- Are regulatory oversight committees or similar entities an effective option?
- What governance, compensation, regulatory, or other information should SROs make available to the public or report to the CFTC?
- Should disciplinary fines imposed by committees, panels, and compliance staff be specifically allocated to regulatory operations?
Please click http://www.cftc.gov/files/opa/opapublichearing021506final.pdf for a copy of the transcript.
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