SIA Petitions SEC for Extension of Compliance Date of Adviser Exemption Rule for Brokers
7.28.2005 The Securities Industry Association (SIA) petitioned the SEC to extend certain compliance dates for Rule 202(a)(ll)-1 under the Investment Advisers Act of 1940 from October 24, 2005 until April 1, 2006. The SIA specifically seeks extension to allow broker-dealers to comply with the financial planning and
discretionary brokerage portions of the Rule (paragraphs (b)(2) and (b)(3)).
Paragraph (b)(2) of the Rule defines when a broker-dealer provides advice that is not solely
incidental to the conduct of its business as a broker or dealer because it is "in connection with
providing financial planning service." "With respect to paragraph (b)(2) of the Rule, an extension is necessary to enable firms to make the required and considered judgments about those activities that are subject to the Investment Advisers Act, and will provide sufficient time for firms to develop and disseminate meaningful disclosures about brokerage and advisory relationships. Rule potentially requires broker- dealers to develop new disclosures, redraft contractual language, and create a process for producing, delivering, and processing these new document." The SIA noted that it takes months for broker-dealers to make minor changes to contractual forms.
Paragraph (b)(3) of the Rule requires firms to treat accounts as investment advisory if the representative exercises investment discretion on more than a "temporary and limited" basis. The SIA stated that Once the initial review is complete, broker-dealers must notify clients whose accounts are "discretionary" under the Rule. Those clients will need time to determine whether they want to maintain non- discretionary brokerage accounts or discretionary investment advisory accounts. Once a client determines the type of account reIationship he wishes to have with a firm, broker-dealers will need time to convert certain accounts into advisory accounts by redrafting contracts, creating a process for delivering, negotiating, and obtaining client signatures on these documents, and recoding the accounts once the documents are returned to the firm.
Please click http://www.sec.gov/rules/petitions/petn4-507.pdf for a copy of the SIA letter in pdf format.
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Chamber of Commerce Files Motion to Stop SEC Independent Chairman Rule
7.26.2005 The U.S. Chamber of Commerce filed a motion with the U.S. Court of Appeals for the D.C. Circuit to freeze a Securities and Exchange Commission rule that requires mutual funds to have an independent chairman.
In June, 2006, the court ruled the SEC had the authority to adopt the rule but had not fully considered costs or alternatives. The SEC affirmed the rule days later in a 3-2 vote.
The Chamber of Commerce stated that the SEC failed to satisfy basic rulemaking requirements by not giving serious consideration to public comments during the regulatory process; ignoring important information about the costs�and the consequences�of the rule; and failing to consider evidence that an independent chair is likely to harm rather than help fund performance. Under the Administrative Procedures Act, government agencies must consider the costs and benefits of rules imposed on industry, and must allow affected persons to be given notice and opportunity to comment on proposed rules.
Please click http://www.uschamber.com/press/releases/2005/july/05-126.htm to access a copy of the press release announcing the motion.
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SEC Chief Economist Speaks On Hedge Funds
7.26.2005 Chester S. Spatt, the SEC's Chief Economist and Director, Office of Economic Analysis, spoke about economic aspects of hedge funds. He recognized that a key ingredient in producing relatively efficient prices is the competitive market forces of large investment pools and the tremendous sums of capital in the marketplace. The ability of "hedge funds" to operate across different market sectors makes hedge funds useful for ensuring the fairness of prices across different market contexts and various margins for pricing. hedge funds and arbitrage capital play a crucial role in the process through which relatively efficient prices emerge. High-powered incentives are crucial to ensuring sufficient search and analysis to limit the extent of mis-pricing prevailing in the marketplace. Indeed, to the extent that there are some sophisticated asset managers that can predictability earn superior risk-adjusted returns, those managers should be able to earn much of the associated economic rents.
Mr. Spatt stated that one of the important reasons for concern about hedge funds by some policymakers is the presence of a variety of incentive conflicts in which the incentives of the principal and the agent who acts on his behalf diverge. He noted that given the investment adviser's interest in the fees that he might receive over time, many advisers are quite naturally very interested in growing their businesses, possibly beyond the size that their investment ideas might support. He stated that a strong implication of this perspective is that advisers may possess incentives to substantially add to the risks that their funds bear if those risks are not fully understood or detected in the marketplace.
In conclusion, Mr. Spatt observed that the preferences of the general partner and limited partners about additional monitoring can diverge. The limited partners would bear much of the cost and derive much of the benefit for monitoring focused upon conflicts in incentives between the general and limited partners. Such monitoring might be attractive to the limited partners to the extent the associated monitoring costs are below the costs of the conflicts of interest that are avoided.
Please click http://www.sec.gov/news/speech/spch072605css.htm to access a copy of the speech.
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SEC Issues Adopting Release for New Rules Overhauling Securities Offering Process
7.19.2005 The SEC adopted rules and amendments that significantly modified the registration, communications, and offering processes under the Securities Act of 1933.
The rules update and liberalize permitted offering activity and communications to allow more information to reach investors by revising the "gun-jumping" provisions under the Securities Act. The cumulative effects of these rules are:
- Well-known seasoned issuers are permitted to engage at any time in oral and written communications, including use at any time of a new type of written communication called a "free writing prospectus," subject to enumerated conditions (including, in some cases, filing with the Commission).
- All reporting issuers are, at any time, permitted to continue to publish regularly released factual business information and forward-looking information.
- Non-reporting issuers are, at any time, permitted to continue to publish factual business information that is regularly released and intended for use by persons other than in their capacity as investors or potential investors.
- Communications by issuers more than 30 days before filing a registration statement will be permitted so long as they do not reference a securities offering that is the subject of a registration statement.
- All issuers and other offering participants will be permitted to use a free writing prospectus after the filing of the registration statement, subject to enumerated conditions (including, in some cases, filing with the Commission). Offering participants, other than the issuer, will be liable for a free writing prospectus only if they use, refer to, or participate in the planning and use of the free writing prospectus by another offering participant who uses it. Issuers will have liability for any issuer information contained in any other offering participant's free writing prospectus as well as any free writing prospectus they prepare, use, or refer to.
- The exclusions form the definition of prospectus are expanded to allow a broader category of routine communications regarding issuers, offerings, and procedural matters, such as communications about the schedule for an offering or about account-opening procedures.
- The exemptions for research reports are expanded.
Please click http://www.sec.gov/rules/final/33-8591.pdf to access the adopting rule.
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Canadian Bank Charged with Aiding Market Timing and Late Trading Violations at Mutual Funds
7.20.2005 The SEC issued an order against Canadian Imperial Holdings Inc. (CIHI) and CIBC World
Markets Corp (World Markets). The Order finds that CIHI and World
Markets, which are subsidiaries of Canadian Imperial Bank of Commerce,
Inc. (CIBC), participated in a scheme to defraud numerous mutual funds
and their shareholders through late trading and deceptive market timing.
The SEC found that CIHI financed hedge fund customers while knowing the hedge funds would
use the leverage to late trade and deceptively market time mutual funds;
b) CIHI provided, and World Markets arranged, improper financing for
market timing hedge fund customers in violation of the margin and
extension of credit requirements; and c) a team of World Markets
registered representatives (�RR�) enabled numerous customers to
deceptively market time, and at least one customer to late trade, mutual
funds.
With respect to the financing, the Order finds that CIHI provided funds
to hedge fund customers knowing those hedge funds would use the leverage
to late trade and market time. By leveraging these entities while
knowing they were engaged in deceptive market timing and late trading,
CIHI participated in a scheme to defraud mutual funds and their long
term shareholders, thus violating the antifraud provisions of the
federal securities laws.
Please click http://www.sec.gov/litigation/admin/33-8592.pdf for the administrative action in pdf.
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Former AIM Officers Settle Market Timing Charges
7.18.2005 The SEC issued an order against against Michael J. Cemo. Cemo is the
former president, CEO and a director of AIM Distributors, Inc. (ADI), a
Commission- registered broker-dealer based in Houston, Texas, which
serves as the primary distributor and principal underwriter to the AIM
mutual fund complex (AIM Funds).
The order finds that Cemo willfully aided and abetted and caused
violations of the federal securities laws based on his role in
authorizing or permitting market timing agreements, spanning January
2001 through September 2003, within certain portfolios of the AIM Funds.
By authorizing or permitting the market timing, Cemo caused AIM
Advisors, Inc. (AIM Advisors) to breach its fiduciary duty to AIM Funds.
Additionally, the timing agreements contravened AIM Funds� prospectus
disclosures relating to market timing activities.
The SEC also issued an order against against Edgar M. Larsen. Larsen is the former Chief Investment Officer of AIM Advisors,
Inc. (AIM Advisors), an SEC-registered investment adviser, which serves as the primary adviser to the AIM Funds.
The order finds that Larsen willfully aided and abetted and caused
violations of the federal securities laws based on his role in
authorizing or permitting market timing agreements, spanning January
2001 through September 2003, within certain portfolios of the AIM Funds.
By authorizing or permitting the market timing, Larsen caused AIM
Advisors to breach its fiduciary duty to AIM Funds. Additionally, the
timing agreements contravened AIM Funds� prospectus disclosures relating
to market timing activities.
Please click http://www.sec.gov/litigation/admin/34-52055.pdf for a copy of the order entered against Cemo.
Please click http://www.sec.gov/litigation/admin/ia-2406.pdf for a copy of the order entered against Larsen.
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New CFTC Chairman Sworn In
7.11.2005 Reuben Jeffery III was sworn in today as a Commissioner and the 10th Chairman of the Commodity Futures Trading Commission (CFTC). His term expires in April, 2007.
Mr. Jeffery was most recently the Special Assistant to the President and Senior Director for International Economic Affairs at the National Security Council. He was previously the Representative and Executive Director of the Coalition Provisional Authority Office (CPA) at the Pentagon, after having served as an advisor to Ambassador Bremer in Iraq. Prior to joining the CPA in May of 2003, Mr. Jeffery served as Special Advisor to the President for Lower Manhattan Development. In this capacity he helped coordinate ongoing federal efforts in support of the longer term recovery and redevelopment of Lower Manhattan in the aftermath of September 11, 2001.
Mr. Jeffery spent eighteen years working for Goldman, Sachs & Co. where he was managing partner of Goldman Sachs in Paris (1997-2001) and of the firm�s European Financial Institutions Group (1992-1997) based in London. Mr. Jeffery has a broad range of international capital markets, corporate finance and merger and acquisition experience.
Click http://www.cftc.gov/opa/adv05/opawa29-05.htm to access a copy of the release announcing the new chairman.
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Hedge Fund Adviser Charged with Making an Unregistered Public Offering
7.8.2005 The SEC issued sanctions under the Securities Act of 1933, the Investment Advisers Act of 1940 and the Investment Company Act of 1940 against
Gerald Klein & Associates, Inc. (GKA) and Klein Pavlis & Peasley
Financial, Inc. (KPP), two Southern California based, registered
investment advisers.
The SEC found that in connection with the offer and sale of interests
in two hedge funds, Invest Talk Partners I, L.P. (Fund I) and Invest
Talk Partners II, L.P. (Fund II), to retail investors, GKA and KPP
willfully violated and willfully aided and abetted and caused violations
of the registration provisions of the Securities Act and the Investment
Company Act. In November 2000, GKA and KPP formed Fund I as a limited
partnership and Invest Talk, Inc. (Invest Talk) to be its general
partner. In December 2000, Invest Talk began offering interests in Fund
I to investors. In 2002, GKA and KPP formed a second hedge fund, Fund
II, and began offering interests in Fund II to investors in June 2002.
GKA and KPP marketed their investment advisory services through radio
programs, investment seminars, and the Internet. While the interests in
Fund I and Fund II were being offered to investors, GKA and KPP
principals talked about these hedge funds, including the reason for
starting the Funds, the investment strategies, and minimum investment
amounts, during at least one radio program.
During the same offering period, the hedge funds were also discussed by
GKA and KPP principals during one or more investment seminars. In
addition, performance figures for the hedge funds, fund strategy, and
contact information were posted for a brief period in the fall of 2002
on the advisers� shared website, which was accessible to the general
public. As a result of these marketing activities, the offerings of the
hedge funds included a general solicitation. Furthermore, as of
November 2002, the combined funds had 112 investors, more than 35 of
whom were non-accredited investors. At no time was there a registration
statement in effect in connection with the offer and sale of interests
in the two hedge funds, and because the offerings included a general
solicitation and were made to over 35 non-accredited investors, there
was no valid exemption from registration. Accordingly, GKA and KPP
willfully violated Sections 5(a) and 5(c) of the Securities Act, and
willfully aided and abetted and caused the hedge funds� violation of
Section 7(a) of the Investment Company Act.
Please click http://www.sec.gov/litigation/admin/33-8585.pdf for the administrative action.
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