Pointing to illiquidity and poor fair valuation conditions, two ranking Congressmen have asked Securities and Exchange Commission Chairman Christopher Cox to cut mutual fund portfolio managers a break on redemptions of auction-rate securities.
Specifically, the two asked for relief on asset-coverage tests, as some closed-end funds are now asking their investors to hold off on redemption orders, or going into private placement markets (see Eaton Vance news, below).
Eaton Closed-Ends Obtain $580M in Private Equity
After failing to redeem $580 million of the shares of three of its tax-free closed-end funds, Eaton Vance has successfully obtained private financing for the preferred shares in question.
Eaton is the second fund outfit to announce failures in the auction market for preferred shares. In April, BlackRock said it was having the same problem in tax-free muni closed-end funds.
This makes it the second time, now, a tax-free fund has been forced to redeem shares. The total number of shares in the Eaton fund, 23,200, will be sold at $25,000 a share, plus dividends, representing a large portion of the funds' outstanding auction preferred shares.
The three funds are the Eaton Vance Insured California Municipal Bond Fund, Eaton Vance Insured Municipal Bond Fund and the Eaton Vance Municipal Bond Fund, which are redeeming 55%, 63% and 65% of their auction preferred shares, respectively.
The shares will be offered through a the tender-option sale and handled in funds-of-tender option bonds (TOBs) via a special-purpose trust. The trust, in turn, will issue two classes: floater certificates and residual certificates.
FINRA Upholds $5M Fine Against American Funds in Anti-Reciprocal Violation
The Financial Industry Regulatory Authority's National Adjudicatory Council upheld last Wednesday FINRA's 2006 decision to fine American Funds Distributors $5 million for directing $98 million in brokerage commissions between 2001-2003 to 46 broker/dealers that sold its family of 29 mutual funds.
The appeals council found that American Funds sent a large bulk of its trades to those B/Ds that gave preferential treatment to, and were top sellers of, its products, including retail brokerage firms without trading capabilities but that could obtain commissions indirectly from American Funds through outside clearing firms associated with the fund complex.
That said, the council said there was no evidence that American Funds was "unjustly enriched, placed unwarranted trades, paid excessive commissions [or that] shareholders were harmed."
Jaffe Rips Bear Stearns' 'Active' Bond ETF
Nationally syndicated columnist Chuck Jaffe was on a bit of a tear against mutual funds last week. Not only did he advise investors to think twice about jumping into a Warren Buffet fund clone, the $3.8 billion Sequoia Fund, run by Buffet's former stock broker, but he also warned investors about Bear Stearns' new actively managed fixed income ETF. (See MME, "Actively Managed ETFs Face Another Delay: Bear Stearns' Fund on Hold as Firm is Put Up for Fire Sale," March 24, 2008.)
Jaffe retorts: "Why Why Why Would I Buy This?" is the hidden meaning behind the fund's ticker, YYY, for the Bear Stearns Current Yield Fund.
The problem with the fund is not the problems of the parent, or even of some of its asset-backed securities holdings, Jaffe writes. The problem is the whole convoluted idea of an actively managed fund in an ETF structure, as MME in its editorial pages has also long held.
Marc Gabelli Hit With $16 Million Timing Fine
Marc Gabelli, son of Mario Gabelli, one of the most famous and highest-paid names in the business, has consented, without admitting to or denying fault, to a $16 million fine from U.S. regulators for processing market-timing trades between 1999 and 2002 from U.K. hedge fund Folkes Asset Management, now going by the name of Headstart Advisers.
Gabelli Funds Chief Operating Officer Bruce Alpert, is also named in the suit, but his role in the case remains open. Headstart earned tremendous profits, according to the complaint, at the expense of a mutual fund the 40-year-old Gabelli ran and whose performance, at the expense of long-term investors, was below par.
Gabelli left Gabelli Funds in January 2006, but his footprints remain at the firm as 5% majority owner of the firm's publicly traded holding company. He also chairs communications manufacturer LGL Group.
SEC Fines BofA, Columbia $10 Million for Disclosure
The Securities and Exchange Commission has filed a settlement enforcement action against Bank of America's Banc of America Investment Services Inc. for failure to disclose it favored two mutual funds.
Columbia Management Advisors LLC was also charged with aiding and abetting, and causing certain violations.
BofA and Columbia agreed to pay a total of $9.8 million in disgorgement and penalties, and the SEC ordered the bank to distribute the settlement to affected clients.
"BAISI's selection of mutual funds for wrap-fee clients was compromised when it favored its own proprietary funds over non-affiliated funds," said Linda Thomsen, director of the SEC Division of Enforcement. "By using a method to select funds that was at odds with information it provided to clients, BAISI violated its duty of loyalty to its clients."
The SEC order found that from July 2002 through December 2004, BofA made material misrepresentations and omissions to clients who had given them discretion to select mutual funds for them. The clients participated in an asset-based or wrap fee program.
BofA had a fiduciary duty to act in the best interests of its clients and was required to disclose material information concerning conflicts of interest.
"This order serves to remind the investment adviser community that the Commission will not tolerate advisers placing their own pecuniary interests ahead of their clients'," said Fredric Firestone, associate director of the SEC Division of Enforcement.
The SEC order found that BofA violated provisions of the Securities Act and Advisers Act, and that Columbia aided and abetted. Under the terms of the settlement, BofA and Columbia agreed to censures, cease-and-desist orders, and a total of $9,763,634 in disgorgement, prejudgment interest and penalties, which will be put into a Fair Fund.
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