RULE PROPOSED TO EXEMPT RESEARCH DEVELOPMENT COMPANIES FROM THE 1940 ACT
11.26.2002 The SEC proposed a rule that would provide a nonexclusive safe harbor from the definition of investment company under the Investment Company Act of 1940 for certain bona fide research and development companies. The rule is intended to allow research and development companies greater flexibility to raise and invest capital pending its use in research, development and other operations and would also clarify the extent to which a company relying on the rule may make investments in other research and development companies pursuant to collaborative research and development arrangements.
Please click http://www.sec.gov/rules/proposed/ic-25835.htm for the release announcing the proposed rule.
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IM DIRECTOR PAUL ROYE SPEAKS ON SARBANES-OXLEY AND OTHER RECENT DEVELOPMENTS IMPACTING INVESTMENT COMPANIES
11.22.2002 In two speeches in November, Paul Roye spoke on the Sarbanes-Oxley Act of 2002, the USA PATRIOT Act and other developments impacting investment companies.
Please click http://www.sec.gov/news/speech/spch112202pfr.htm for his speech given in Washington, D.C. at the Meeting of the Business Law Section of the American Bar Association, Committee on Federal Regulation of Securities on November 22, 2002.
Please click http://www.sec.gov/news/speech/spch111402pfr.htm for his speech given in Washington, D.C. at the Twentieth Annual
Advanced ALI-ABA Conference on Life Insurance Company Products on November 14, 2002.
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BANK SECRECY ACT TO APPLY TO INVESTMENT COMPANIES
11.20.2002 The SEC approved a staff recommendation to issue jointly,
with the Department of the Treasury and the Board of Governors of the
Federal Reserve System, a report to Congress on applying the anti-money
laundering requirements of the Bank Secrecy Act to investment companies,
as required by Section 356(c) of the USA Patriot Act. The proposed
report recommends regulations to apply the requirements of the Bank
Secrecy Act to investment companies, including certain unregistered
investment companies. The report will be published after approval by
the Department of the Treasury and the Board of Governors of the Federal
Reserve System.
Please click http://www.sec.gov/news/digest/11-20.txt for additional information about the proposal.
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AUDITOR INDEPENDENCE RULES PROPOSED
11.20.2002 The SEC proposed rules to enhance the independence
of accountants that audit and review financial statements and prepare
attestation reports filed with the SEC. As directed by Section
208(a) of the Sarbanes-Oxley Act of 2002, the SEC is proposing
rules to:
- revise its regulations related to the non-audit services that,
if provided to an audit client, would impair an accounting
firm's independence;
- require that an issuer's audit committee pre-approve all audit
and non-audit services provided to the issuer by the auditor
of an issuer's financial statements;
- prohibit partners on the audit engagement team from providing
audit services to the issuer for more than five consecutive
years;
- prohibit an accounting firm from auditing an audit client's
financial statements if certain members of management of that
client had been members of the accounting firm's audit
engagement team within the one-year period preceding the
commencement of audit procedures;
- require that the auditor of an issuer's financial statements
report certain matters to the issuer's audit committee,
including "critical" accounting policies used by the issuer;
and
- require disclosures to investors of information related to the
audit and non-audit services provided by, and fees paid by the
issuer to, the auditor of the issuer's financial statements.
In addition, under the proposed rules, an accountant would not be
independent from an audit client if any partner, principal or
shareholder of the accounting firm who is a member of the engagement
team received compensation based directly on any service provided or
sold to that client other than audit, review and attest services.
The SEC has not yet issued the release proposing these rules.
As required by Section 802 of the Sarbanes-Oxley Act, the SEC also proposed a rule requiring accounting firms to retain audit records for a five-year period. The rule would apply to all workpapers and other documents that form the basis of the audit or review, as well as to all other documents and records that (1) are created, sent or received in connection with the audit or review, and (2) contain conclusions, opinions, analyses, or financial data related to the audit or review. Materials would have to be retained whether they support or cast doubt on the final conclusions reached by the auditor.
Please click http://www.sec.gov/rules/proposed/33-8151.htm for the release announcing the proposed rule.
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FEEDER HEDGE FUND CHARGED WITH FRAUD
11.15.2002 The United States District Court for the Southern District of New York issued, at the request of the SEC, a preliminary injunction against Beacon Hill Asset Management LLC (Beacon Hill).
The SEC alleged that Beacon Hill,
located in Summit, New Jersey, managed three "feeder" hedge funds -
Bristol Fund, Ltd., Safe Harbor Fund L.P., and Milestone Plus Partners
L.P. - as well as a "master" fund, Beacon Hill Master, Ltd., through
which the feeder funds conducted trading. The funds principally
invested in the mortgage-backed securities markets on a leveraged basis.
The complaint alleges that, for at least the periods ending July 31,
August 31, and Sept. 30, 2002, Beacon Hill reported net asset values and
corresponding returns to fund investors that it knew or should have
known were materially overstated. Among other things, on Oct. 8, Beacon
Hill reported to investors that the Safe Harbor and Bristol funds had
suffered losses estimated at 25% during the month of September. On Oct.
17, however, Beacon Hill reported to investors that losses were
approximately 54% -- more than double the amount reported on Oct. 8 -
including losses that had not been reported during prior periods. The
SEC's complaint alleges that Beacon Hill violated the antifraud provisions of the Investment Advisers Act of 1940.
In addition to granting an injunction against Beacon Hill,
the court's order requires that:
- Beacon Hill and the hedge funds report to the court within 10 days that
Beacon Hill is no longer managing the funds and that a new investment manager
is in place;
- No redemptions, withdrawals, distributions, or extraordinary payments be
made from the funds without court approval;
- The funds cause the new investment manager to file periodic reports with
the court, the SEC, and investors; and
- Beacon Hill preserve all relevant documents and cooperate fully to
enable the new investment manager to perform its duties.
Please click http://www.sec.gov/litigation/litreleases/lr17841.htm for the release announcing the administrative action.
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ADVISER CHARGED WITH MISAPPROPRIATING CLIENT ASSETS
11.8.2002 The SEC instituted an administrative proceeding against Robert C. Sears, an unregistered investment adviser, for allegedly misappropriating his
clients' funds by causing unauthorized transfers from his clients'
accounts at several brokerage firms. To accomplish the transfers, Sears
either forged his clients' signatures on letters directing the brokerage
firms to transfer funds or fraudulently induced clients to transfer
funds to the bank account of a corporation, Last Minute Concessions,
Inc. (Last Minute), co-owned by Sears and another individual who is a
relief defendant in the Commission's civil case relating to this matter.
To generate the transferred cash, Sears forged client signatures on
margin agreements and obtained unauthorized margin loans in client
accounts. Last Minute used the money to buy a controlling interest in
Cold Spring Golf, an entity developing a golf course near Belchertown,
Massachusetts. Last Minute also purchased stock in Cold Spring
Development, which was to build an adjoining condominium community. The
Commission's complaint further alleged that when Sears' clients
eventually learned of the transfers and began to question Sears, he
provided varying false explanations, including that the money had been
invested in government bonds that would earn 15% interest. Sears did
not disclose to clients that he had used the money to buy a controlling
interest in Cold Spring Golf for Last Minute. Clients who relied on him
as a fiduciary for investment advice did not know that Sears had taken
advantage of their trust and served his own financial interest at their
expense.
Please click http://www.sec.gov/litigation/admin/ia-2078.htm for the release announcing the administrative action.
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SEC PROPOSES PROFESSIONAL CONDUCT RULES FOR ATTORNEYS
11.6.2002 The SEC proposed rules rules implementing provisions of
the Sarbanes-Oxley Act that prescribe "minimum standards of professional
conduct for attorneys appearing and practicing before the Commission in
any way in the representation of issuers." The standards must include a
rule requiring an attorney to report "evidence of a material violation
of securities laws or breach of fiduciary duty or similar violation by
the company or any agent thereof" to the chief legal counsel (CLO) or
the CLO and the chief executive officer of the company (or the
equivalent); and, if they do not respond appropriately to the evidence,
requiring the attorney to report the evidence to the audit committee,
another committee of independent directors, or the full board of
directors.
Please click http://www.sec.gov/rules/proposed/33-8150.htm for the release announcing the proposed rules.
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ADVISER CHARGED WITH DEFRAUDING A UNION
11.4.2002 The SEC settled an administrative
proceeding against William M. Stephens (Stephens). The SEC found that
in March 2000, Stephens was associated with a registered investment
adviser. At that time, Stephens met with certain persons who offered to
introduce Stephens to the trustees of certain union pension funds (the
"Union Funds") so that Stephens and his firm could become financial
advisers to the Union Funds. Stephens agreed that after he and his firm
became financial advisers to the Union Funds, he would arrange to divert
a portion of the Union Funds into investments controlled by the persons
who introduced him to the Union Funds and those persons would pay
kickbacks to the pension fund trustees who hired Stephens and his firm.
Neither Stephens nor his firm became advisers to the Union Funds. As a
result, no payments were ever made to any trustees of the Union Funds.
The SEC order:
- requires Stephens to cease and desist from committing or
causing any violation and any future violations of the antifraud provisions of the Investment Advisers Act of 1940, the
Securities Act of 1933, and the Securities Exchange Act
of 1934;
- requires Stephens to pay a $25,000 civil penalty; and
- bars Stephens from association with an
investment adviser, with the right to reapply for association after two
years.
Please click http://www.sec.gov/litigation/admin/33-8143.htm for the release announcing the administrative action.
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SEC FILES CHARGES AGAINST AN UNREGISTERED INVESTMENT COMPANY
11.4.2002 The SEC filed a civil
action in the United States District Court for the Eastern District of
Missouri against Jawsh Corporation (Jawsh) for offering unregistered
securities and acting as an unregistered investment company.
The SEC's complaint alleges that in about 1984 Jawsh was formed
as a Missouri corporation by William L. Bates (Bates) of St. Louis,
Missouri, who was, at all times, the company's sole shareholder, officer
and director. The Complaint also alleges that, from about 1987 through
about September 2000, Jawsh, through Bates, publicly offered and sold
$16 million in unregistered securities to 250 investors in at least 11
states through the means and instruments of interstate commerce and the
mails. The SEC's complaint also alleges that Jawsh pooled money
obtained from investors and invested it, reinvested it and traded in
securities without a registration statement being in effect with the
SEC as to Jawsh. The SEC's complaint also alleges that
Jawsh thereby violated Sections 5(a) and 5(c) of the Securities Act of
1933 (Securities Act) and Section 7(a) of the Investment Company Act of
1940 (Investment Company Act). Simultaneously with the filing of the
civil action, Jawsh settled the case with the SEC.
Please click http://www.sec.gov/litigation/complaints/comp17826.htm for the release announcing the SEC administrative action.
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