Compliance

SEC Governor Cynthia Glassman once again spoke out vehemently against the Commission's new rule that will require fund boards to have independent chairmen. "This debate is not over," she said, referring to a lawsuit that the U.S. Chamber of Commerce has brought against the SEC and a request by Congress for the Commission to look at the effects of the new rule.

Soon to retire Sen. Peter Fitzgerald (R-Ill.) recently applauded the efforts of federal securities regulators for their continuing efforts to enact a series of mutual fund reforms that benefit individual investors.

The NASD has come down on 29 broker/dealers for more than 8,000 instances of failing to disclose reportable information to customers. The firms have neither admitted to nor denied allegations, but consented to the entry of the findings. Reportable information includes customer complaints, regulatory actions, criminal charges and convictions.

Two attacks on the SEC's requirement for independent board chairmen are unlikely to topple the hotly contested rule, industry insiders say, and like it or not, funds run by outsiders could find their fees, and therefore their profits, reduced. But one ploy that could result would be a delay past the current Jan. 16, 2006 deadline for funds to install independent chairmen.

Paul Roye, director of the SEC's division of investment management, recently indicated that clearly defining what can be exchanged between brokers and fund companies through soft dollars will be a priority of the Commission in 2005. Speaking before the Consumer Federation of America, Roye said that this will be a "front-burner" priority, one that will probably be resolved by limiting the definition of "research."

Securities regulators have launched an informal probe of mutual fund and brokerage firms to determine whether brokers doled out lavish gifts to attract trading business.

The NASD has barred James B. Moorehead, a former broker with AmSouth Investment Services, from the securities industry for life for alleged fraud, forgery, and falsification of documents in connection with variable annuity sales.

The Securities and Exchange Commission's formal dealings with mutual fund companies reportedly will continue into next year if the Commission follows through on plans to punish investment firms for failing to provide mutual fund board members with vital information.

ORLANDO, Fla. -- Speaking at the 2004 Operations Conference and Service Provider Exhibition here, Investment Company Institute President Paul Schott Stevens stressed the importance of funds and their operations support working together with regulators and the media to redefine the culture of the mutual fund business in the wake of the largest scandal in its history.

NEW YORK -- While corporate governance in the financial services industry has improved markedly over the past year, unsettled problems such as high executive compensation and continued conflicts of interest must be rectified, a top Ernst & Young executive said last Tuesday. The resulting tightened regulation combined with heightened competition from separately managed accounts and alternative investments for high-net-worth investors, is going to mean an especially competitive landscape in the year ahead, he said.

Although the Securities and Exchange Commission had indicated it would have solutions to eradicate market timing and late trading before the year is up, the Commission is still looking at alternatives to the hard 4 p.m. close and 2% redemption fees on shares redeemed within five days. The SEC is also still looking at how to improve point-of-sale disclosure on commissions and other fees on broker-sold funds, as well as curbing soft-dollar arrangements. SEC Chairman William Donaldson made these revelations at a Securities Industry Association meeting in Boca Raton, Fla., earlier this month.

The Securities and Exchange Commission is reportedly considering shifting some of its responsibilities to the states, as the agency expects a surge of up to 15% in the number of investment advisors it oversees once the new hedge fund registration requirements become effective in February 2006.

Hedge fund Beacon Hill Asset Management and four of its top executives have settled with the Securities and Exchange Commission for $4.4 million stemming from fraud charges. In addition, the four executives have been barred from the investment advisory business. The principals -- President John Barry, CIO Thomas Daniels, Senior Portfolio Manager John Irwin and Chief Financial Officer Mark Miszkiewicz -- will pay, respectively, $1.2 million, $1.5 million, $750,000 and $400,000. Only Miszkiewicz will have the opportunity to ever be reinstated into the business, but he will not be allowed to reapply for four years.

Securities and Exchange Commission examiners are reportedly finding instances of fund managers intentionally mispricing junk bond and small-cap stock mutual fund holdings and may soon take action.

Market-timing woes continue to pervade the mutual fund industry, as even smaller shops are getting caught in the act.

A U.S. subsidiary of Dutch financial services firm ING Group indicated in an SEC filing that the NASD has made a preliminary recommendation that an enforcement action be brought against the affiliate and one of its registered agents. ING Insurance Co. of America said that ING Funds Distributor had received a notice from the regulatory agency and it has an opportunity to respond before NASD staff makes a final recommendation. At issue are three arrangements dating back to 1995, 1996 and 1998 in which the administrator to the then-Pilgrim Funds allowed frequent trading. The Pilgrim Funds later became part of the ING Funds. In September, ING said that an internal review of its mutual fund trading operation showed only isolated incidents of impropriety.

From Sarbanes-Oxley reforms to anti-money laundering rules to the USA PATRIOT Act, the rate of regulatory change within the investment management industry has dramatically increased over the last several years. Mutual fund managers now find themselves dividing their time between meeting the requirements of new laws and maintaining their primary focus of managing and growing assets.

Much as we'd like to move along to something else, we're forced by current events to end the year with yet another discussion of compliance jobs. One year ago, we had Eliot Spitzer to thank for moving the noble profession of compliance professional out of the wings and directly onto center stage. Here we go again.

Franklin Templeton Investments filed "false and misleading statements" with the Securities and Exchange Commission by not admitting to wrongdoing in settling its mutual fund case, Massachusetts Secretary of the Commonwealth William Galvin has charged.

The NASD has fined Citigroup Global Markets $250,000 for distributing inappropriate hedge fund sales literature. The penalty marks the agency's heftiest fine for abusive hedge fund sales practices by broker/dealers.