MFA Updates Sound Practices for Hedge Fund Managers
8.31.2005 The Managed Funds Association (MFA), a trade group for the hedge fund industry,updated its
Sound Practices for Hedge Fund Managers, which contains recommendations
that are intended to promote sound business practices for hedge fund
managers. The update from
the 2003 Sound Practices expands the coverage of key topics for hedge
fund managers such as internal trading controls, responsibilities to
investors, valuation, and risk controls. It also adds two appendices
that provide checklists for developing compliance manuals and codes of
ethics.
Please click http://www.mfainfo.org/images/PDF/MFAs_2005_Sound_Practices_FINAL.pdf for a copy of the update.
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Mutual Fund Directors Forum Weighs in on Independent Chairman Rule
8.30.2005 The Mutual Fund Directors Forum (MFDF), an independent not-for-profit membership organization devoted to educating and furthering the views of independent directors of registered investment companies, issued a survey that finds that costs incurred by mutual funds operating in compliance with the SEC's new fund governance requirements ("Complying Funds") were at the low end of the range of costs estimates provided by the SEC. The new SEC governance rules require an independent chairman and each fund's board to have at least 75% of its directors to be independent of the investment adviser.
According to the survey, a majority of the Complying Funds have incurred additional compensation costs to the independent chairman, while minorities incurred recurring professional education costs, one-time proxy solicitation expenses, and one-time and recurring fees of outside legal counsel. Although these expenses were not de minimis (one fund group expects over $500,000 in recurring fees of outside counsel), the MFDF said they are likely to have a negligible impact on a fund's operating costs and will almost certainly be substantially less than one percent of the fund's advisory fees.
Please click http://www.mfdf.com/UserFiles/File/ReportofSurvey.pdf for a copy of the survey.
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Georgia Hedge Fund Charged with Fraud
8.23.2005 The SEC filed a complaint in the United States
District Court for the Northern District of Georgia against Barry Alan
Bingham and Bingham Capital Management Corporation alleging that, from approximately April 2001
to approximately November 2002, Bingham used misrepresentations and
omissions of material fact to defraud at least 22 investors in Bingham
Growth Partners, L.P. (Growth Partners), a hedge fund that Bingham
created and managed through Capital Management, an unregistered
investment adviser.
According to the SEC, Bingham offered and sold at least
$1,826,218 worth of shares in the Fund, at least $459,483 worth of which
were offered and sold on the basis of Bingham�s misrepresentations to
investors about the Fund�s past returns. Additionally, the complaint
alleges that, between July 2001 and November 2002, Bingham
misappropriated approximately $141,637 of Growth Partners� assets,
including as much as $34,638 in client assets as �soft dollar credits�
generated from Growth Partners� trading commissions.
Bingham and Capital Management was charged with violating of
Section 17(a) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections
206(1) and (2) of the Investment Advisers Act.
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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Two Hedge Funds Under Investigation for Possible Fraud
8.21.2005 It has been reported that two large hedge fund managers are being investigated by federal and state regulators, including the the Connecticut Department of Banking, for possible fraud.
The Bayou Group, a $400 million hedge fund firm based in Stamford, Connecticut, is being investigated becasue of reports that investors were unable to get their money out of its two funds. Bayou, founded in 1996 by Samuel Israel III, managed two hedge funds, the Bayou Fund LLC and Bayou Fund Ltd., as well as a brokerage arm, Bayou Securities.
The SEC also continues to examine the collapse of a $200 million, West Palm Beach, Florida, hedge fund firm called the KL Group. on March 2, 2005, the SEC filed an emergency civil action to halt a massive fraud by the hedge fund group that includes an unregistered investment adviser and an affiliated registered broker-dealer. The Commission�s complaint alleges that beginning as early as 1999 and continuing through February 2005 the hedge funds raised over $81 million from at least 250 investors by boasting of consistent above-market returns through trading in aggressive growth stocks. The investment advisers also sent false account statements to investors in at least one of the hedge funds that showed consistently high returns. In contrast to the statements made to investors, the hedge funds were suffering tremendous trading losses.
Please click http://www.sec.gov/news/press/2005-27.htm for the earlier press release about the KL Group.
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ICI Issues Report on Mutual Funds and Retirement Plans
8.18.2005 The Investment Company Institute (ICI) issued a report stating that retirement assets invested in mutual funds reached a record $3.1 trillion in 2004. The report found that investors saving on their own and through employer-sponsored defined contribution plans are increasingly choosing lifestyle and lifecycle funds, a move reflected in the rapid growth of these funds over the last several years. A lifestyle fund invests in a mix of equity and fixed income securities to maintain a certain risk level and generally contains "conservative," "moderate," or "aggressive" in the fund's name; a lifecycle fund typically rebalances the asset mix to an increasingly conservative portfolio as the target date of the fund approaches.
Please click http://www.ici.org/pdf/1fm-v14n4.pdf for a copy of the report.
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NASD Reviewing Hedge Fund Sales by Broker-Dealers
8.16.2005 The NASD is investigating sales by broker-dealers of hedge funds to individual investors. Letters have been sent to at least ten broker-dealers. The NASD would not comment on the specific areas that they are examining, exept that they are investigating sales of hedge funds with minimum investments of $50,000 or less and broker sales incentives related to such sales. Some of the hedge funds are a registered funds that invest in other hedge funds.
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CFTC Permits SEC-Registered Adviser to Rely Upon Two Exemptions Simultaneously
8.15.2005 The CFTC took the position that a SEC-registered investment adviser relying upon the commodity trading advisor (�CTA�) registration exemption provided by
Section 4m(3) of the Commodity Exchange Act with respect to certain of its
advisory activities, may simultaneously claim exemption from CTA registration pursuant to
CFTC Rule 4.14(a)(8)2 with respect to certain of its other advisory activities.
Section 4m(3) provides that CTA registration
is not required for an SEC-registered investment adviser �whose business does not consist
primarily of acting as a commodity trading advisor�, as defined in the Act, �to any investment
trust, syndicate, or similar form of enterprise that is engaged primarily in trading any commodity
for future delivery on or subject to the rules of any contract market or registered derivatives
transaction execution facility.� The investment adviser currently relies on Section 4m(3) to be exempt from CFTC registration.
The adviser now desires to to advise a commodity pool (the �Fund�) for which it will not be able to
rely upon exemption from CTA registration under Section 4m(3), but will be eligible to claim
exemption from CTA registration under Rule 4.14(a)(8). The advise sought relief simultaneously to rely upon the statutory exemption from CTA
registration under Section 4m(3) with respect to certain of its activities and file a claim for
exemption under Rule 4.14(a)(8) with respect to certain of its other activities.
The CFTC took the position that if the activities of an SEC-registered investment
adviser meet the requirements of Section 4m(3), and the investment adviser desires
to advise a commodity pool in a manner consistent with the requirements of Rule 4.14(a)(8), the
investment adviser should be able simultaneously to rely on the CTA registration exemption
provided by Section 4m(3) and to claim exemption from CTA registration under Rule
4.14(a)(8)
Please click http://www.cftc.gov/files/tm/letters/05letters/tm05-13.pdf for a copy of the CFTC no-action letter in pdf format.
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XBRL Voluntary Program Extended to Investment Companies
8.8.2005 EXtensible Business Reporting Language (XBRL) turns text-
based information, such as the filings currently available through EDGAR system, into documents that can
be retrieved, searched and analyzed through automated means. The SEC expanded its voluntary
program to allow investment compaines to file exhibits to their annual report to
shareholders (N-CSR) and quarterly statement of portfolio holdings (N-Q)
using XBRL. The SEC believes that this action will make it easier for investors and others to use
disclosure documents filed with the SEC.
Please click http://www.sec.gov/news/press/2005-112.htm to access a copy of the release.
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Former 529 Plan Official Sued for Misappropriating Assets
8.4.2005 The SEC filed a complaint in the United States
District Court for the District of Utah, against Dale C. Hatch, the
former director of the Utah Educational Savings Plan (UESP), alleging that Hatch misappropriated
funds that should have been allocated to the accounts of participants
who had placed their money with the UESP. The complaint also alleges
that Hatch established secret accounts and transferred over $500,000 in
unallocated participant funds into Hatch�s nominee accounts. The complaint also alleges that Hatch transferred approximately $85,000 from
the secret nominee accounts into personal bank accounts for his own use.
Separately, the SEC brought administrative action against USEP. According to the SEC, UESP, when it fired Hatch,it disclosed the agency�s internal control deficiencies, the UESP failed
to fully disclose material facts related to its accounting and
operational deficiencies, ongoing risks to investors, and
mischaracterized the source of the funds Hatch misappropriated.
Specifically, the Commission�s Order finds that the UESP made untrue
statements of material facts and omitted material facts regarding
investment earnings and potential losses of investors, the method by
which transactions were effected and accounted for by the UESP, and
certain ongoing internal control weaknesses. Furthermore, the UESP had
stated that funds misappropriated by Hatch were administrative funds
when in fact those funds belonged to the UESP�s investors.
Please click http://www.sec.gov/litigation/litreleases/lr19324.htm to access the release.
