On November 20, 2000, NASDR announced that it issued a complaint against a broker dealer and two of its executives for allegedly fraudulent marketing and sale of the broker dealer's proprietary bond funds. NASDR alleges that the broker dealer sold over $2 billion of the bond funds to over 100,000 customer accounts through the use of a firm-wide internal marketing campaign that misrepresented the funds as safe, secure, low-risk investments. The complaint alleges that the broker dealer targeted certificate of deposit holders and other conservative investors, many of whom were elderly with moderate, fixed incomes, for sales of these securities. NASDR alleges that the marketing campaign failed to include critical information about the significant risks and potential volatility of the funds, including the fact that the funds' portfolios contained a large percentage of risky and volatile mortgage derivative securities, known as inverse floaters, aggressively employed a risky borrowing strategy, were highly interest-rate sensitive, and were dependent on a low-interest-rate environment to achieve their projected returns.

The broker dealer sold the funds in three separate offerings from October 1992 to November 1993. After interest rates rose in 1994, the funds lost over 30 percent in net asset value and were forced to reduce their dividends by nearly a third. The market prices of the funds also declined significantly, losing over $600 million in market value. Nearly 30,000 customers sold at least some portion of their funds, suffering realized losses of approximately $65 million.

NASDR claims that the broker dealer conducted an internal marketing campaign to encourage its brokers to sell the bond funds. The campaign presented the funds to brokers as a simple and safe investment, as an investment that was suitable for virtually all investors, and as a safe, high-quality alternative to CDs. NASDR alleged that the campaign failed to mention, or obscured, the significant risks associated with the funds.

NASDR also found that the broker dealer used internal newsletters which suggested misleading sales presentations, such as:

• using a "simple" comparison of the bond funds with CDs, omitting any discussion of the differences between the funds and CDs or of the additional risks associated with the funds;
• stating that the funds were suitable for retirees for whom "safety" was a "major concern;" and
• recommending a sales approach for investors who "don't want the volatility associated with interest rate moves."

The complaint also charges that the broker dealer sold a significant percentage of the bond funds to elderly customers seeking income as their primary investment objective. Over $500 million of the funds were sold to investors 70 years of age and older.

The complaint charges the broker dealer with violations of the NASD's antifraud, suitability, and supervisory rules, and with violations of its rule requiring that members adhere to high standards of commercial honor and just and equitable principles of trade.

One of the executives mentioned individually was charged with overseeing and approving roadshow presentations for the funds that misleadingly portrayed them as safe, low-risk investments that should be sold to investors looking for certificate of deposit equivalents. The other executive named individually was charged with sending sales memoranda to numerous branch managers of the broker dealer that encouraged improper sales of the funds through misleading sales presentations. NASDR charged both executives with violations of the NASD rule requiring that members adhere to high standards of commercial honor and just and equitable principles of trade. NASDR Press Release, November 20, 2000.

The U.S. Court of Appeals for the Ninth Circuit recently ruled that shareholders of a registered investment company had direct claims under Section 13 of the 1940 Act for alleged violations of the fund's fundamental policies. The court also ruled that the shareholders' claims under Section 18 of the 1940 Act, as described below, were properly dismissed.

The plaintiffs alleged that the fund had a fundamental policy permitting it to engage in short sales of securities with a value of up to 25% of the fund's total assets and a fundamental policy limiting the issuance of senior securities. The fund, without a shareholder vote, subsequently increased the limit on short sales to 40%. The plaintiffs alleged that the subsequent increase in short sales led to substantial losses. The plaintiffs further alleged that the policy change violated Section 13 of the 1940 Act, which provides that fundamental policies may not be changed without a shareholder vote. In its defense, representatives of the fund questioned whether these policies should be considered fundamental. The plaintiffs also alleged that the short sales created senior securities, in violation of the fund's fundamental policy and the restrictions on senior securities in Section 18(f) of the 1940 Act. The district court ruled that the plaintiffs' claims under both Sections 13 and 18 of the 1940 Act were derivative and could not be pursued by the plaintiffs individually as shareholders, but instead could only be pursued on behalf of the fund.

On appeal, the Ninth Circuit ruled that state law determined whether the claims were direct or derivative. The fund was organized as a series of a Massachusetts business trust. In the case of the purported violations of Section 13, the court ruled that Massachusetts law provides a direct claim for the violations of plaintiffs' contractual rights as shareholders to vote on proposed changes to fundamental policies. The court then remanded the plaintiffs' Section 13 claims for further proceedings. The court also found that the purported issuance of senior securities exceeded Section 18(f)'s limits, but that because the violation did not affect plaintiffs' voting rights, they had only a derivative claim on behalf of the fund. Lapidus v. Hecht, No. 99-15835 (9th Cir. Nov. 13, 2000).

On November 20, 2000, the SEC issued a fee rate advisory notifying filers that Congress passed and the President signed an extension of the current continuing resolution through December 5, 2000. Until the SEC receives a permanent appropriation for fiscal 2001, the fee rate on filings made pursuant to Section 6(b) of the Securities Act of 1933 will remain at the current rate of $264 per $1,000,000. The amount of the fee can be determined by multiplying the aggregate offering amount by .000264. The SEC anticipates that when an appropriations bill is enacted, the fee rate will decrease to $250 per $1,000,000.

SEC adopts rule amendments regarding auditor independence. On November 15, 2000, the SEC adopted amendments to the rules governing auditor independence. The SEC stated in its adopting release that it proposed these rules to ensure auditor independence requirements "remain relevant, effective, and fair in light of significant changes in the profession, structural reorganizations of accounting firms." Specifically, the SEC noted that accounting firms have increasingly ventured into providing non-audit services which may create conflict of interest issues for the accounting firm.

In the adopting release, the SEC articulated four guiding principles by which to measure an auditor's independence. Under these principles, an accountant's independence is called into question when the accountant:

• has a mutual or conflicting interest with the audit client,
• audits his or her own firm's work,
• functions as management or an employee of the audit client, or
• acts as an advocate for the audit client.

The rule as adopted outlines the requirements for auditor independence in three areas:

• investments by auditors or their family members in audit clients;
• employment relationships between auditors or their family members and audit clients; and
• the scope of services provided by audit firms to their audit clients.

In response to a number of comment letters on the proposed rule, the SEC has modified the final rule to:

• significantly reduce the number of audit firm employees and their family members whose investments in, or employment with, audit clients would impair an auditor's independence. The SEC has limited the restrictions on audit firm employees to those who work on the audit or who could influence the audit.
• identify nine non-audit services that, if provided to an audit client, would impair an auditor's independence. The SEC noted that seven of the nine are already restricted by the AICPA, SECPS or SEC. These services include:
• bookkeeping or other services related to the audit client's accounting records or financial statements,
• financial information systems design and implementation,
• some appraisal or valuation services or fairness opinions,
• actuarial services,
• internal audit services,
• management functions,
• human resources functions,
• broker-dealer services, or
• legal services.
• provide a limited exception to an accounting firm for inadvertent violations if the firm has quality controls in place and corrects the violation promptly; and
• require companies to disclose in annual proxy statements certain information about non-audit services provided by their auditors during the last fiscal year.

The new rule becomes effective 60 days after publication in the Federal Register. However, the rule provides a transition period of 18 months for new restrictions on services. SEC Release Nos. 33-7919; 34-43602; 35-27279; IC-24744; IA-1911; FR-56; File No. S7-13-00. November 15, 2000.

On November 21, 2000, the CFTC approved rules to overhaul its regulation of the futures industry by establishing three new tiers under which the futures markets will operate. The CFTC stated that the new tiers are meant better to reflect the varying facets of the markets, to replace the current "one-size-fits-all" approach and to respond to CFTC critics that claimed that the CFTC's enforcement regime had become too heavy-handed and burdensome.

The new rules create the following three tiers of regulation:

• Recognized Futures Exchanges (RFEs), which will have the most comprehensive oversight and be able to trade any commodity and serve any trader;
• Recognized Derivatives Transaction Facilities (DTFs), which will adhere to seven core principles covering enforcement, transparency and oversight, and which will include exchanges where the traded contracts are for underlying commodities that have an inexhaustible supply; and
• Exempt Multilateral Transaction Facilities (MTFs), suitable for exchanges catering to institutional investors dealing in commodities with inexhaustible deliverable supplies.

According to the CFTC, the RFEs will garner the greatest oversight scrutiny. Because the DTFs are geared toward more sophisticated institutional investors, they will receive an intermediary amount of oversight. MTFs would operate free of direct oversight by the CFTC.

In addition to the new regulatory framework, the CFTC also approved a new regime for clearing organizations. Now, clearinghouses overseen by the CFTC or other federal regulators will be able to clear transactions executed on exempt MTFs. The rules go into effect 60 days after they are published in the Federal Register..

SEC solicits comments regarding proposed rule changes by the National Association of Securities Dealers Regulation ("NASDR") concerning related performance information. On November 2, 2000, the SEC published a notice to solicit comments on recently proposed changes to the NASDR's rules regarding use of related performance information. NASDR has proposed new Interpretive Material 2210-5 and conforming amendments to existing Conduct Rule 2210 and Interpretive Material 2210-2.

These rule changes have been proposed to respond to the SEC's no-action position permitting investment companies to present related performance information in sales material and prospectuses.

The SEC generally permits the presentation of performance of:

1. a mutual fund from which the offered fund has been "cloned";
2. a non-investment company account which has been converted into the advertised mutual fund;
3. private, investment company or institutional accounts that are managed in a similar manner by the mutual fund's adviser; and
4. a mutual fund that was previously managed by the offered fund's portfolio manager.

NASDR noted that Conduct Rule 2210 requires NASD members to file various forms of advertisement and sales literature for mutual funds with NASDR. NASDR then reviews these filings to determine whether the material meets applicable standards designed to ensure that the material is fair, balanced and not misleading. NASDR further noted that historically, it has prohibited the presentation of related performance information, except predecessor information, in mutual fund and variable product sales material.

Under the proposed rule, NASD members would be permitted, subject to certain conditions, to present the performance of related parties in all of the scenarios above currently permitted by the SEC except for the case where a mutual fund seeks to provide the performance of a fund that was previously managed by the offered fund's portfolio manager. NASDR reiterated its concern that presentation of this type of manager performance could mislead or confuse investors about the contributions of other investment adviser personnel to the mutual fund's performance. NASDR believes that the efforts of these personnel and the resources of the investment adviser are, in most cases, "critical" to the fund's performance. NASDR also expressed concern about the potential "staleness" of performance figures due to the possibly long time period which may elapse between the departure of a portfolio manager from the previous mutual fund and the advertisement of the new fund's performance. The comment period closes on December 26, 2000. Federal Register Vol. 65, No. 217, November 8, 2000.

The SEC is proposing amendments to the exemption under the 1940 Act that permits a registered investment company that has certain affiliations with an underwriting participant to purchase securities during an offering. Section 10(f) of the 1940 Act prohibits a fund from purchasing any security during an underwriting or selling syndicate if the fund has certain affiliated relationships with a principal underwriter for the security ("affiliated underwriter"). The SEC noted that when Congress enacted the section, it also included a provision to provide the SEC with the specific authority to issue rules or orders exempting transactions from the prohibition, if consistent with the protection of investors.

The SEC adopted Rule 10f-3 which permits a fund to purchase securities in a transaction otherwise prohibited by Section 10(f), if certain conditions are met. The proposed amendments would expand the exemption provided by the rule to permit a fund to purchase government securities in a syndicated offering. Currently, government securities, including securities issued by agencies or instrumentalities of the U.S. government, are not included in the types of securities that Rule 10f-3 permits affiliated funds to purchase. The SEC noted that until recently, there has been little need to exempt the purchase of government securities from Section 10(f), because these securities generally have not been offered through "selling syndicates" or underwritings that involve affiliated underwriters.

The SEC commented that recently, government-sponsored enterprises began to offer their securities through syndicated underwritings. Because Rule 10f-3 does not provide an exemption from Section 10(f) for affiliated funds to purchase government securities, affiliated funds have been unable to purchase securities in those offerings. As a result, investors in those funds have been unable to benefit from the purchases their funds otherwise would have been able to make. In proposing to expand the exemption under Rule 10f-3 to include government securities, the SEC commented that government securities are high-quality investments, and therefore are unlikely to be dumped into a fund by an affiliated underwriter.

The proposed amendments also would modify the rule's quantitative limit on purchases, to cover purchases by a fund as well as any account advised by the fund's investment adviser. One of the key conditions of Rule 10f-3 is that a fund, together with any other fund advised by the fund's adviser, purchase no more than 25 percent of an offering ("percentage limit"). The SEC noted that the purpose of the percentage limit is to provide an indication that a significant portion of an offering is being purchased by persons acting independently of the adviser.

The SEC noted that a possible "loophole" in the rule could permit an investment adviser to circumvent the percentage limit by failing to aggregate purchases by its other (i.e., non-fund) clients with the purchases by the funds. As a result, if an adviser purchases most or all of an offering for its fund clients and non-fund clients, the percentage limit may not provide a reliable indicator of market forces. The adviser could use these controlled accounts to assure the success of the affiliated underwriting, thus undermining an important protection that Section 10(f) provides fund shareholders.

The SEC has proposed to amend the rule to include purchases by any other account over which the adviser has discretionary authority or exercises control. Therefore, if a fund purchases securities in reliance on Rule 10f-3, the fund's purchases, aggregated with purchases by any other fund advised by the fund's adviser, and any other account over which the fund's adviser has discretionary authority or otherwise exercises control, could not exceed 25 percent of the offering. The SEC must receive comments on or before February 15, 2001. SEC Release No. IC-24775; File No. S7-20-00.

Gene Gohlke, associate director of the SEC's Officer of Compliance Inspections and Examinations ("OCIE") warned investment advisers that OCIE is currently conducting a special focused sweep of investment advisers it suspects may have engaged in "portfolio pumping" and "window dressing."

Mr. Gohlke further reported that the SEC suspected certain funds that are the focus of the sweep because of net asset values which suddenly rose in value on the last day of the calendar year only to fall again on the first or second day of the new year. A manager may engage in portfolio pumping when he or she purchases a substantial number of additional shares of a security already held in the portfolio on the last day of a reporting period to fraudulently drive up the price of the security. Mr. Gohlke noted that by purchasing a large block of shares in the open market, the manager may drive up the price of the particular security and correspondingly, drive up the value of the existing stock in the fund's portfolio. Mr. Gohlke further noted that a manager may engage in such activity to attain a high position in fund rankings or to increase compensation when an upcoming bonus is tied to performance.

The SEC stated that it will look for the following activities related to suspected portfolio pumping in these special exams:

• whether the portfolio manager trades in already-owned securities that have enjoyed good performance at the close of the trading day and at the end of a performance measurement period; and
• whether the portfolio manager then sells those securities early at the beginning of the next performance measurement period. The SEC noted that while this second prong is part of the suspected pattern, it is not required for the SEC to conclude that pumping has occurred.

The SEC will also look for the following indicators of window dressing:

• If the portfolio manager buys or sells securities at the end of a reporting period to mislead investors as to the securities held by the fund, the strategies engaged in by the portfolio manager or the source of the fund's performance.
• If a portfolio manager purchases a security that was popular during the reporting period, especially if the fund did not hold it for most of the period, but towards the end, the manager purchases the security because he or she knows that the holding will be listed in reports to shareholders.
• If a fund owns securities that are inconsistent with the fund's investment objective or level of risk. The SEC will further examine the timing of the holding to see if the manager sells these securities before the end of the reporting period so that shareholders remain unaware that the portfolio had these securities during the period.

The SEC also recommended the following best practices to aid in the oversight of inappropriate portfolio pumping and window dressing:

• Assess whether the adviser agrees that the concepts of portfolio pumping and window dressing are inappropriate.
• Establish a fund policy that these practices are inappropriate.
• Determine what policies are in place to detect portfolio pumping and window dressing and whether compliance personnel could detect occurrences of these practices by using these policies.
• Establish oversight and compliance procedures to regularly monitor the portfolio's holdings using measurements such as betas to determine whether the securities held are appropriate.
• Put compliance procedures in place to review trading on the last day of performance periods.
• If the adviser identifies inappropriate trades, determine if the procedures call for appropriate sanctions.
• Establish a system to inform trustees when the adviser detects a pattern of inappropriate activity and/or where the adviser has taken some remedial action.
  

The 2nd U.S. Circuit Court of Appeals affirmed a district court's finding that a shareholder alleging breaches of fiduciary duty by the directors of several closed-end funds was required to make demand on the funds' board of directors before bringing suit under Section 36(a) of the 1940 Act. The court affirmed a decision of the Southern District of New York which dismissed the shareholder's claim that the defendants breached their fiduciary duties by allowing the fund shares to trade at substantial discounts to net asset value. The district court dismissed the case because the shareholder's claims were derivative in nature and she did not plead that demand on the board would have been futile.

The court affirmed the district court holding and ruled that "where an injury is suffered by a corporation and the shareholders suffer solely through depreciation in the value of their stock, only the corporation itself . . . or a stockholder suing derivatively in the name of the corporation may maintain an action."

Marquit v. Williams, No. 00-7985, (2d Cir., Oct. 13, 2000).

The CFTC proposed an automatic guaranteed extension for specific commodity pools in filing annual reports. The CFTC reported that commodity pools which invest in other collective vehicles, so-called funds of funds, have previously encountered difficulty obtaining data from their investment vehicles in a timely manner. As a result, these funds of funds routinely file requests for extensions of the filing deadline.

The CFTC's proposal requiring funds of funds commodity pool operators seeking to use the automatic extension to:

• for the first year, file in advance of the annual report's due date;
• in following years, file the request when the annual report is actually delivered; and
• maintain documentation the reasons justifying the extension.

Securities Regulation and Law Report, Vol. 32 No. 44, November 13, 2000.

S&P has requested a hearing on an application by the Vanguard Index Funds (the "Funds") for an exemptive order to permit the Funds to issue exchange-traded classes of shares based on the S&P 500 and other S&P indices. S&P explains that it requested the hearing because the matter is the subject of pending litigation between S&P and the Funds. S&P argued that if S&P prevails in its litigation, the Funds' exemptions should be denied outright.

In its request, S&P noted that the Funds and S&P are parties to a license agreement that gives the Funds certain limited rights to use S&P's 500 Index and trademarks. S&P claimed that the Funds cannot use the S&P name and indices in any manner not expressly authorized under the terms of the license agreement without S&P's authorization. S&P noted that it discovered in May that the Funds publicly filed an application in support of their proposal to issue an exchange-traded class of shares called VIPERs (Vanguard Index Participation Equity Receipts). S&P claims that three of the Funds are specifically designed to track S&P's proprietary equity indices.

Upon learning of the application, S&P initiated a court action which is now pending in the U.S. District Court for the Southern District of New York. S&P is seeking a declaration that the issuance of VIPERs would constitute a breach of the license agreement and a violation of federal trademark and unfair competition law. S&P notified the SEC of its pending litigation and the underlying legal issues in August. S&P reportedly also advised that the Funds were incorrect in representing in their exemptive application and the related registration statement that S&P had licensed its trademarks and indices for use by the Funds in connection with VIPERs.

S&P requested the hearing to present the substantial legal doubts that exist with regard to the Funds' use of the S&P indices and name in connection with VIPERs. In the alternative, S&P suggested that the SEC require the Funds to await the judicial determination of their rights before granting the exemptive order. According to S&P, that action would avoid the "potentially onerous process of untangling a complicated series of transactions in VIPERs." The SEC Today, November 2, 2000.

The SEC's Division of Market Regulation informed a company that the SEC could not offer assurance that it would not recommend enforcement action under Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act") if the company operated a web site in the manner described in its request for no-action relief without registering as a broker-dealer.

The company planned to operate a web site to facilitate meetings between individuals or businesses interested in obtaining debt and/or equity financing and accredited investors. Potential investors would be given access to a database where they could search for available investments based on search criteria. Sample search criteria could include the state in which to invest, the type of business/industry of the company, the amount the company seeks to raise or the amount the investor wishes to invest.

The company noted that it would not make any recommendations concerning any offering of securities listed on the web site. Further the company would not:

• advise any users on the merits of any investment opportunity;
• participate in negotiating the terms of any investment;
• hold itself out as providing any securities-related services other than a listing or matching service;
• directly assist investors or listing companies with the completion of any transaction; or
• handle funds or securities involved in completing the transaction.

In denying the company's request for no-action relief, the SEC noted that Section 15(a) of the Exchange Act makes it unlawful for a broker or dealer "to effect any transactions in, or to induce or attempt to induce the purchase or sale, of any security . . . unless such broker or dealer is registered" with the SEC. The SEC further noted that Section 3(a)(4) of the Exchange Act defines a "broker" as a person that is "engaged in the business of effecting transactions in securities for the account of others." The SEC has previously found that a person effects transactions in securities if he or she participates in such transactions "at key points in the chain of distribution." The SEC has provided examples of participation that includes, among other activities:

• structuring a securities offering or transaction,
• identifying potential purchasers of securities,
• screening potential purchasers of securities,
• soliciting securities transactions, and
• taking transaction orders from customers.

The SEC noted that to determine if a person was "engaged in the business," it would look for factors such as whether the person received transaction-related compensation, held itself out as a broker, solicited securities transactions or assisted others in completing securities transactions.

Based on the company's description of its activities, the SEC decided that the company's activities would make it a broker within the meaning of Section 3(a)(4) of the Exchange Act. Progressive Technology Inc. no-action letter, October 11, 2000.

On November 2, 2000, the SEC announced that it will continue to support the EDGAR legacy filing system along with the modernized EDGAR filing system beyond the original November 27, 2000 transition date. The SEC reported it has extended the transition deadline to April 20, 2001 at the request of members of the filing community. The SEC noted that filers may not submit filings on the EDGAR legacy system after this date. Instead, filers must submit filings to EDGAR over the internet, through direct transmission or on magnetic tape cartridge.

The SEC also reminded filers of the one-day shutdown of EDGAR operations on November 24, 2000. On that date, the SEC will not receive or disseminate electronic filings to allow sufficient time for a major upgrade to the EDGAR system. The filing desk will remain open on November 24 to accept filings that are permitted to be made in paper format, including filings made under EDGAR hardship exemptions.

SEC permits operating companies to treat investments in money market funds as cash items in determining whether a company is an investment company. The SEC's Division of Investment Management issued a no-action letter permitting industrial operating companies to treat investments in money market funds as cash items rather than investment securities for purposes of determining whether a company meets the definition of an investment company under the Investment Company Act of 1940, as amended (the "1940 Act").

A law firm requested the relief on behalf of a variety of industrial operating companies which engage in capital-intensive businesses and raise substantial amounts of cash through debt and equity offerings or divestitures of operating divisions or subsidiaries. The firm claimed that these companies must maintain a substantial amount of liquid assets to commit capital expenditures on short notice. Section 3(a)(1)(C) of the 1940 Act defines investment company to mean any issuer whose holdings in investment securities (excluding government securities and cash items) exceed 40% of its total assets. A company's need to invest cash temporarily may create uncertainty as to an industrial company's status as an investment company.

Rule 3a-1 under the 1940 Act is intended to exclude from regulation as an investment company certain prima facie companies whose asset composition and sources of income provide evidence that such companies are not investment companies. The rule provides a non-exclusive safe harbor for issuers that otherwise would meet the definition of investment company set forth in Section 3(a)(1)(C) provided that no more that 45% of the company's assets consist of, and not more than 45% of the issuer's net income after taxes is derived from, certain specified securities. These specified, excludable securities include government securities, securities issued by majority owned subsidiaries and, subject to certain criteria, other companies controlled primarily by the company.

These operating companies typically invest the proceeds of any debt or equity offerings in government securities to ensure that their holdings of "investment securities" will not exceed the thresholds of the 1940 Act. However, the firm noted that government securities at times offer a lower rate of return than other non-speculative short-term money market instruments, including shares of money market funds, so the firm’s clients lose millions of dollars in potential yield. The firm claimed that it would be appropriate to consider as a cash item, rather than as an investment security, an investment in shares of a registered investment company operating as a money market fund that seeks to maintain a stable net asset value per share of $1.

In granting the no-action relief, the staff noted that money market funds did not exist when Congress drafted Section 3(a)(C)(1) in 1940. The staff also noted that money market funds did not exist in their current form when the SEC adopted the asset and income tests of rule 3a-1 under the 1940 Act in 1981. The staff believes that Congress and the SEC would have concluded that an issuer's holdings of money market fund shares, even though they are securities, usually are not determinative of an investment company business. The staff noted that money market fund shares have the same essential qualities as a cash item, including a high degree of liquidity and relative safety of principal.

Accordingly, the staff advised that it would not object if an issuer, in calculating the amount of its total assets and its investment securities for purposes of either the 40% test in Section 3(a)(C)(1) or the asset and income tests of rule 3a-1, does not include the shares of a money market fund that seeks to maintain a stable net asset value of $1. The staff concluded that this position should provide flexibility to operating companies in managing their cash holdings. Willkie Farr & Gallagher no-action letter, October 23, 2000.