SEC PROPOSES MANDATORY 2% MUTUAL FUND REDEMPTION FEE
2.25.2004 The SEC proposed a new rule that would require all mutual funds to impose a 2% fee on the redemption proceeds of shares redeemed within 5 days of their purchase. The fund would retain the proceeds from the redemption fees. The rule is designed to require short-term shareholders to reimburse the fund for the direct and indirect costs that the fund pays to redeem these investors� shares. In the past, these costs generally have been borne by the fund and its long-term shareholders. Thus the redemption fee would be a �user fee� to reimburse the fund for the cost of accommodating frequent traders.
The rule would not apply to money market funds and exchange-traded funds. It also would not apply to mutual funds that encourage active trading and disclose to investors in the prospectus that such trading will likely impose costs on the fund.
Please click http://www.sec.gov/news/press/2004-23.htm for a copy of the press release announcing the proposed rule.
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HOUSE COMMITTEE APPROVES VARIOUS AMENDMENTS TO THE 1940 ACT
2.25.2004 The Financial Services Committee of the House approved H.R. 2179, which if enacted would add several amendments to the Investment Company Act of 1940, including:
- Prohibit any 12b-1 fee after a mutual fund has been closed to new investors, other than to cover certain shareholder servicing activities;
- Require investment advisers and distributors, when entering into or renewing a contract with a mutual fund, to inform the board of directors of any of their conflicting business practices; and
- Require the board of directors of an investment company to select a lead independent director.
Please click http://financialservices.house.gov/legis.asp?formmode=item&number=277 for more information about the bill.
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PROPOSED RULE WOULD PROHIBIT USE OF BROKERAGE COMMISSIONS TO FINANCE SALE OF MUTUAL FUND SHARES
2.24.2004 The SEC proposed amendments to Rule 12b-1 under
the Investment Company Act of 1940. The proposed amendments would
prohibit funds from paying for the distribution of their shares with
brokerage commissions. The proposed amendments also would require funds
that use a selling broker-dealer to execute portfolio securities
transactions to adopt, and the fund's board of directors to approve,
certain policies and procedures.
Please click http://www.sec.gov/rules/proposed/ic-26356.htm to access a copy of the release proposing the rule.
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COLUMBIA FUNDS CHARGED WITH MARKET TIMING
2.24.2004 The SEC filed a civil fraud action day in federal
court in Boston alleging that Columbia Management Advisors, Inc. and
Columbia Funds Distributor Inc. allowed certain preferred mutual fund
customers to engage in short-term and excessive trading, while at the
same time representing publicly that it prohibited such trading.
The SEC's complaint alleges that, from at least 1998 through
2003, Columbia Distributor secretly entered into arrangements with at
least nine investors allowing them to engage in frequent short-term
trading in at least seven funds, including international funds and a
fund aimed at young investors. The complaint alleges that, in some of
the arrangements, defendants accepted so-called "sticky assets" - long-
term investments that were to remain in place in return for allowing the
investors to actively trade in the funds. The complaint alleges that
the nine investors who entered the arrangements engaged in frequent
short-term or excessive trading in at least sixteen different Columbia
funds. It further alleges that executives of Columbia Distributor
entered into the arrangements, and that Columbia Advisors knew and
approved of eight of the arrangements and allowed them to continue
despite knowing such short-term trading was detrimental to long-term
shareholders in the funds.
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SEC POSTPONES SOX FILING REQUIREMENT FOR INVESTMENT COMPANIES
2.23.2004 The SEC postponed the compliance date by which investment companies must include in their annual reports a report of management on the company's internal control over financial reporting. Investment companies originally were required to maintain internal control over financial reporting with respect to fiscal years ending on or after June 15, 2004, and to make officer certifications to that effect in annual reports on Form N-CSR for fiscal years ending on or after that date. The SEC has extended this compliance date to November 15, 2004.
Please click http://www.sec.gov/rules/final/33-8392.htm for a copy of the release announcing the postponement.
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IM DIRECTOR SPEAKS AT NICSA CONFERENCE
2.23.2004 SEC Investment Management Division Director Paul Roye spoke at the National Investment Company Service Association 22nd Annual Conference & Expo in Miami, Florida. NICSA provides educational and related services for the operations and shareholder servicing sector of the fund industry.
Mr. Roye noted that many of the problems related to mutual funds that have recently surfaced directly involved fund service providers, including late trading and incorrect break points. He further noted that the SEC is pursuing an aggressive rulemaking agenda that is focused on four main goals (1) to address late trading, market timing and related abuses; (2) to improve oversight of funds by enhancing fund governance, ethical standards, and compliance and internal controls; (3) to address or eliminate certain conflicts of interest; and (4) to improve disclosure to fund investors, especially fee-related disclosure.
Please click http://www.sec.gov/news/speech/spch022304pfr.htm for a copy of Mr. Roye's speech.
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Please click http://www.sec.gov/litigation/complaints/comp18590.htm for a copy of the administrative action.
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BROKER-DEALERS CHARGED IN FEE BREAKPOINT CASES
2.13.2004 The SEC found that HD Vest Investment Securities, Inc. failed to deliver mutual
fund breakpoint discounts to certain customers on sales of Class A
mutual fund shares. Breakpoint discounts are volume discounts applied
to the front-end load charged to investors who purchase Class A mutual
fund shares. The extent of the discount depends upon the amount the
customer invested in a particular mutual fund family. According to data
Vest submitted to NASD, Vest is estimated to have failed to give certain
customers breakpoint discounts totaling approximately $725,216 during
2001 and 2002. The Order also finds that Vest failed to make adequate
disclosure to customers in connection with its sales of large amounts
($100,000 or greater) of Class B mutual fund shares. In recommending
that certain customers purchase these shares, Vest failed to adequately
disclose that an equivalent investment in Class A shares could yield a
higher return as a result of applicable breakpoint discounts and reduced
ongoing expenses.
Please click http://www.sec.gov/litigation/admin/33-8383.htm for a copy of the administrative action.
In separate actions, the SEC and NASD announced enforcement and disciplinary
actions against a total of 15 firms for failure to deliver mutual fund
breakpoint discounts during 2001 and 2002. The SEC Orders find that the firms, by failing to disclose to certain
customers that they were not receiving the benefit of applicable
breakpoint discounts.
Please click http://www.sec.gov/news/press/2004-17.htm for a copy of the press release announcing the actions.
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SEC PROVIDES ANTI-MONEY LAUNDERING GUIDANCE IN A NO-ACTION LETTER
2.12.2004 On April 29, 2003, the SEC issued the CIP Rule jointly with the Treasury Department under Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act). The CIP Rule requires brokers-dealers to implement customer identification programs that contain the following elements: (1) procedures for verifying the identities of customers, (2) procedures for maintaining records of the verification process, (3) procedures for comparing customers with lists of known or suspected terrorists or terrorist organizations, and (4) procedures for providing customers with notice that information is being collected to verify their identities.
Paragraph (b)(6) of the CIP Rule permits broker-dealers to rely on certain other financial institutions to undertake the required elements with respect to shared customers. The rule permits such reliance if, among other things, the other financial institution is subject to an AML Rule and regulated by a Federal functional regulator. Paragraph (b)(6) also requires that the reliance be reasonable under the circumstances and that the relied-on financial institution enter into a contract requiring it to certify annually to the broker-dealer that it has implemented an anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the broker-dealer's customer identification program.
Because these advisers are registered with the SEC, they meet the requirement that the relied-on financial institution be regulated by a Federal functional regulator. However, the SEC noted that they are not currently subject to an AML Rule and, consequently, do not meet this condition of paragraph (b)(6) of the CIP Rule. On April 28, 2003, the Financial Crimes Enforcement Network (FinCEN), Department of the Treasury, proposed an AML Rule for registered investment advisers.
Nevertheless, the SEC stated in this letter that broker-dealers are permitted to treat registered investment advisers as if they are subject to an AML Rule for the purposes of paragraph (b)(6) of the CIP Rule, provided:
- such reliance is reasonable under the circumstances;
- the investment adviser is regulated by a Federal functional regulator; and
- the investment adviser enters into a contract requiring it to certify annually to the broker-dealer that it has implemented an anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the broker-dealer's customer identification program.
The SEC stated that this letter is withdrawn without further action on the earlier of: (1) the date upon which an AML Rule for advisers becomes effective, or (2) February 12, 2005.
Please click http://www.sec.gov/divisions/marketreg/mr-noaction/sia021204.htm to access a copy of the no-action letter.
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DISCLOSURE RULES ADDRESSING APPROVAL OF MUTUAL FUND ADVISORY CONTRACTS PROPOSED
2.11.2004 The SEC proposed rule and form amendments designed to improve the disclosure provided by mutual funds about how their boards of directors evaluate and approve, and recommend shareholder approval of, investment advisory contracts. The proposed amendments would require a mutual fund to provide disclosure in its shareholder reports regarding the material factors and the conclusions with respect to those factors that formed the basis for the board�s approval of advisory contracts during the reporting period. The shareholder reports disclosure would be required for any new investment advisory contract or contract renewal, including subadvisory contracts, approved during the semi-annual period covered by the report, other than a contract that was approved by shareholders.
Please click http://www.sec.gov/rules/proposed/33-8364.htm for a copy of the release proposing the rule and form amendments.
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MFS SETTLES ADMINISTRATIVE CHARGES
2.5.2004 Massachusetts Financial Services Co.
(MFS), its chief executive officer John W. Ballen, and its president and
chief equity officer Kevin R. Parke, settled administrative charges brought by the SEC in connection with alleged market timing. The SEC ordered MFS to pay $225 million, consisting of $175
million in disgorgement and $50 million in penalties. The SEC's
order further requires MFS to undertake certain compliance and mutual
fund governance reforms designed to enhance the independence of mutual
fund boards of trustees and strengthen oversight of MFS's compliance
with the federal securities laws.
Please click http://www.sec.gov/litigation/admin/ia-2213.htm for a copy of the administrative action.
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NASD ISSUES OMNIBUS TASK FORCE REPORT
2.4.2004 The NASD issued the Omnibus Account Task Force Report. The Task Force was formed to consider how omnibus processing of mutual fund transactions might affect the imposition of a mandatory redemption fee, in light of the fact that mutual fund complexes typically do not have information that identifies the customers who acquire and dispose of mutual fund shares through omnibus accounts held at intermediaries.
Please click http://www.nasd.com/pdf_text/omnibus_report.pdf for a copy of the report.
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