BANC ONE INVESTMENT ADVISORS SETTLES MARKET TIMING AND SELECTIVE DISCLOSURE CHARGES
6.29.2004 The SEC found that Banc One Investment Advisors (BOIA) violated, and Mark Beeson, former President of the One Group Mutual Funds, aided and abetted the violations of various securities laws. Specifically, BOIA and Mr. Beeson
- allowed excessive short-term trading in One Group funds by hedge-fund manager Edward J. Stern in the hope of attracting additional business, which created a conflict of interest because the trading increased BOIA�s advisory fees;
- failed to charge Stern redemption fees as required by One Group�s international-fund prospectuses;
- did not have written procedures in place to prevent the nonpublic disclosure of One Group portfolio holdings and improperly provided confidential portfolio holdings to Stern when other shareholders were not provided the same information; and
- caused One Group Funds to participate in certain prohibited joint transactions.
The SEC ordered BOIA to pay disgorgement of $10 million and a civil penalty of $40 million and ordered Beeson to pay a civil penalty of $100,000.
Please click http://www.sec.gov/litigation/admin/ia-2254.htm for a copy of the administrative action.
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OCIE PROVIDES GUIDANCE IN A SPEECH ON NEW MUTUAL FUND COMPLIANCE RULE
6.28.2004 A representative of the SEC's Office of Compliance and Examinations gave a speech at the ICI Mutual Fund Compliance Conference in Washington, D.C. He spoke on the following topics:
- Designating a Chief Compliance Officer;
- Adopting compliance policies and procedures;
- Conducting the annual compliance review; and
- Reporting to the fund Board of Directors.
In his concluding remarks, the SEC official stated that OCIE "examiners will be asking the following questions on and after October 6: Has there been an honest effort on the part of all parties to establish an effective compliance program? Has the Chief Compliance Officer diligently and intelligently administered that program? Is the program being reviewed and updated frequently in light of the nature of the firm's business and the risks it faces? And, has the firm created a vibrant culture of compliance?"
Please click http://www.sec.gov/news/speech/spch063004lar.htm for a copy of the speech.
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SEC TO MAKE AVAILABLE COMMENT LETTERS
6.24.2004 The SEC that it
will begin releasing comment letters and filer responses relating to
disclosure filings reviewed by its Division of Corporation Finance
and the Division of Investment Management. The letters should be useful to mutual fund and other issuer filers because they set forth staff positions on a particular filing.
Comment letters and
response letters relating to disclosure filings made after August 1,
2004, that are selected for review will be released not less than 45
days after the staff has completed a filing review.
Please click http://www.sec.gov/news/press/2004-89.htm for the press release announcing the new policy.
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SEC ADOPTS RULES REQUIRING INDEPENDENT MUTUAL FUND CHAIRMAN AND FUND ADVISORY CONTRACT APPROVAL DISCLOSURE RULE
6.23.2004 In an effort to enhance the independence and effectiveness of a mutual fund's independent directors, the SEC adopted rules and rule amendments that require:
- independent directors to constitute at least 75 percent of the fund's board;
- mutual funds to have a chairman who is an independent director;
- the board to assess its own effectiveness at least once a year;
- independent directors to meet in separate sessions at least once a quarter; and
- mutual funds to authorize the independent directors to have the ability to hire their own staff.
Mutual funds have 18 months to comply with these new corporate governance requirements.
The SEC also approved new disclosure rule amendments that will require fund shareholder reports to discuss, in reasonable detail, the material factors and the conclusions with respect to these factors that formed the basis for the board of directors' approval of advisory contracts during the most recent fiscal half-year. Because fund shareholder reports will contain disclosure with respect to all advisory contracts approved by the board, the amendments will remove the existing requirement for disclosure in the Statement of Additional Information.
Please click http://www.sec.gov/rules/final/33-8433.htm for a copy of the adopting release.
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FPA REQUESTS SEC TO WITHDRAW ADVISER ACT BROKER EXEMPTION RULE PROPOSAL
6.21.2004 The Financial Planning Association (FPA) today filed comments with the SEC urging the agency to repeal a nearly five-year old rule proposal by the SEC that would exempt broker-dealers from having to register as investment advisers under the Investment Advisers Act of 1940 under certain conditions. Specifically, a broker-dealer providing investment advice to its brokerage customers would not be required to treat those customers as advisory clients solely because of the form of the broker-dealer's compensation if it satisfied the following three conditions:
- the broker-dealer must not exercise investment discretion over the account from which it receives special compensation;
- any investment advice is incidental to the brokerage service provided to each account; and
- advertisements for and contracts or agreements governing the account must contain a prominent statement that it is a brokerage account.
The comment letter emphasizes the problems the rule poses to consumers, noting �the registered representative [stockbroker] - unlike a registered investment adviser - has no blanket fiduciary duty to place the client�s interests first.�
Please click http://www.fpanet.org/member/press/releases/062104_SEC.cfm to access a copy of the press release discussing the FPA comment letter.
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REGULATION B PROPOSAL WILL IMPACT BANK BROKER AND ADVISORY ACTIVITIES
6.17.2004 The SEC proposed Regulation B, which contains a number of new exemptions for banks from the definition of the term "broker" under Section 3(a)(4) of the Securities Exchange Act of 1934. Regulation B will implement provisions under the Gramm-Leach-Bliley Act, which was the legislation that lowered barriers between the banking and securities industries erected by the Banking Act of 1933 ("Glass-Steagall Act"). Regulation B would broaden a number of exemptions already available to banks, savings associations, and savings banks that effect transactions in securities.
One key provision of Regulation B is the "networking exception." The networking exception in Section 3(a)(4)(B)(i) of the Exchange Act and further fleshed out in Regulation B will allow banks to partner with broker-dealers in offering their customers a wide range of financial services, including securities brokerage. Specifically, the exception provides that a bank will not be considered a broker if, under certain conditions, the bank enters into a contractual or other written arrangement with a registered broker-dealer under which the broker-dealer offers brokerage services to bank customers ("networking arrangement"). If the bank's networking activities meet the conditions of the exception, it may, without itself being registered as a broker-dealer, receive compensation related to brokerage transactions the broker-dealer effects as a result of the networking arrangement. The exception also allows unregistered bank employees36 to engage in limited securities-related activities and to receive incentive compensation in the form of a "nominal one-time cash fee of a fixed dollar amount" for referring bank customers to the broker-dealer.
Please click http://www.sec.gov/rules/proposed/34-49879.htm to access a copy of the release proposing Regulation B.
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HEDGE FUND CHARGED WITH ISSUING FALSE ACCOUNT STATEMENTS
6.16.2004 The SEC settled a public administrative proceeding against Samer M. El Bizri and his company, Bizri Capital Partners, Inc. (BCP). The
SEC found that Bizri and BCP recklessly participated in a scheme to provide investors in three hedge
funds with account statements that materially overstated their interests
in the funds and rates of returns.
Specifically, the SEC found that from June 2000
through September 2001, with the exception of a three-month period,
Integral Investment Management, LP, the general partner of three hedge
funds, Integral Equity, LP, Integral Hedging, LP and Integral Arbitrage,
LP, caused the Funds to overstate to investors
the value of their investments by anywhere from 13% to 77% per month.
Please click http://www.sec.gov/litigation/admin/33-8430.htm to access a copy of the administrative order.
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NASD AND SEC ISSUE REPORT ON THE SALE OF VARIABLE INSURANCE PRODUCTS
6.9.2004 The NASD and SEC jointly released a report entitled "Joint SEC/NASD Staff Report on Examination Findings Regarding Broker-Dealer Sales of Variable Insurance Products." The report identifies "sound" and "weak" broker-dealer practices in the areas of sales suitability, disclosure, supervision, training and records maintenance.
Variable insurance products are hybrid investments that contain both securities and insurance features. Because of tax implications and potentially high surrender charges, the report stated that these products are long-term investment vehicles that are not appropriate for short-term goals. Some of the weaknesses identified in the report were instances of brokers making unsuitable recommendations to senior citizens and to individuals who could not afford the products without mortgaging their homes. Other weaknesses included failures to disclose fully the various fees, risks, and tax consequences associated with these products.
Please click http://www.sec.gov/news/studies/secnasdvip.pdf to access a copy of the report.
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