Chairman Schapiro addressed the Society of American Business Editors and Writers at their annual Conference in Denver on April 27, 2009. In her address, Chairman Schapiro noted that “there has never been a time when investors have needed a strong advocate more than they do today.” She further pointed out several areas in which the SEC needs to enhance its role as regulator:

• Money Market Funds: Chairman Schapiro noted that in June, the SEC will propose enhancements to the rules governing credit quality, maturity and liquidity provisions currently applicable to money market funds. The SEC is also reviewing more fundamental changes to protect investors from runs on funds, including floating rate NAVs.
• Custody: The SEC is considering two proposals, one which would strengthen controls applicable to custodians of client funds and securities, including possible surprise accounting examinations and third-party compliance audits, and another which would require a senior officer of an adviser or broker-dealer to certify custody controls.
• Proxies: In the next month the SEC will consider a proposal to remove barriers to proxy access in nominating directors.
• In addition to these major enhancements, said Chairman Schapiro, the SEC will also be considering regulating hedge funds, enhancing disclosures regarding municipal securities, and expanding the pay-to-play rules.

For more information, please see: http://www.sec.gov/news/speech/2009/spch042709mls.htm  

On May 5, 2009 the SEC filed charges against the operators of the Reserve Primary Fund (the “Fund”) in connection with the Fund’s breaking of the buck on September 17, 2008. In the enforcement action, the SEC claims that the operators of the Fund failed to provide material information to the Board of Trustees of the Fund and investors in the Fund in the wake of Lehman Brothers’ bankruptcy filing.

In particular, the SEC alleges that the Fund’s managers misrepresented that the Reserve Management Company, Inc. (“RMCI”) would provide enough capital to maintain a $1 NAV, when RMCI had no intention of doing so. In addition, the SEC alleges that RMCI understated the volume of redemption requests received by the Fund and did not provide the Trustees with accurate information regarding the value of the Fund’s Lehman holdings.

For more information, please see: http://www.sec.gov/news/press/2009/2009-104.htm. To read the full complaint, please see: http://www.sec.gov/litigation/complaints/2009/comp21025.pdf                                  

On May 14, 2009 the SEC announced that it had proposed rule amendments that would strengthen the review processes of investment advisers who have custody of their clients’ assets. While an investment adviser typically does not have actual physical custody of client assets, it may be deemed to have custody where the investment adviser can withdraw client funds from the custodian of the assets, or where the custodian is an affiliate of the investment adviser.

Under the proposed amendments an investment adviser with custody would be required to submit to yearly “surprise exams” by an independent public accountant, which would verify the proper handling of client assets (it remains to be seen whether this amendment would alter the staff no-action position articulated in the Crocker no-action letter now relied upon by advisers affiliated with a bank to avoid surprise audits). In addition, an investment adviser having direct custody of client assets would be subject to a custody control review, commonly referred to as a SAS-70 report, by a Public Company Accounting Oversight Board (PCAOB) registered and inspected accountant. The SAS-70 report would detail the controls in place, test those controls, and provide the results of such tests.

In addition, the proposed amendments would require custodians to provide custodial statements directly to advisory clients rather than sending them through the adviser, as well as require investment advisers to advise their clients to compare custodial statements received from the custodian with those received from the adviser.

For more information, please see: http://www.sec.gov/news/press/2009/2009-109.htm

A report by the SEC’s inspector general identified two SEC enforcement lawyers who are under investigation for possible violations of SEC internal rules prohibiting improper trading. The report has been submitted to federal prosecutors, who are investigating whether the employees have violated insider trading laws.

It remains to be seen whether violation of internal SEC rules took place and, if so, if doing so was a criminal violation. Both employees have denied trading on “inside information,” but the internal investigation turned up several suspicious trades in which the employees traded on securities of companies around the time the companies were under investigation by the SEC.

In response to the inspector general’s finding that the SEC’s compliance system is deficient, the SEC has stated that it will hire a chief compliance officer and update its computer system to enhance review of SEC employees’ securities trading.

For more information, please see: http://online.wsj.com/article/SB124241028545124563.html  

The MSRB released a notice reminding broker-dealers that Build America Bonds are subject to all MSRB rules. Build America Bonds provide federal subsidies either through a tax credit to investors or a refundable tax credit paid to state and local government issuers. The tax credit given to investors can be stripped from the underlying bond and transferred on its own.

In its release the MSRB notes that Build America Bonds are municipal securities because they are issued by state and local governments, and that therefore all MSRB rules apply to them.

For more information, please see: http://www.msrb.org/msrb1/whatsnew/2009-15.asp                                          

The European Commission issued a directive proposing demanding regulatory standards on funds over $100 million in value. The threshold is higher, $500 million, for funds not using leverage. The regulations will include reporting requirements as well as marketing standards and governance standards.

In addition to the funds themselves, key service providers, including administrators and advisers, will be subject to new regulations.

For more information, please see: http://ec.europa.eu/internal_market/investment/alternative_investments_en.htm

An investment firm has requested that the DOL consider treating the underlying assets held by mutual funds as “plan assets” as defined under ERISA when an ERISA plan has invested in the mutual fund. Such a designation would import the fiduciary duty owed to plan investors under ERISA to the mutual fund’s portfolio holdings.

The current ERISA statute specifically excludes the assets of investment companies registered under the Investment Company Act of 1940 (the “Investment Company Act”) from the scope of ERISA when a plan invests in them. In that case, the securities issued by the investment company are considered plan assets, but the underlying assets in the investment company are not.

The SEC and the DOL have scheduled a one-day joint hearing exploring issues regarding target-date or lifecycle funds. Scheduled for June 18, 2009, the SEC’s published notice of the hearing does not specify possible regulation under ERISA as a topic for the hearing.

For more information, please see: http://www.pionline.com/article/20090420/PRINTSUB/304209971.
For notice of the hearing, please see: http://www.sec.gov/news/press/2009/2009-107.htm  

The Treasury has requested that Congress act quickly to create a regulatory framework for OTC derivatives, which are currently generally exempted or excluded from regulation under the Commodity Exchange Act (“CEA”). In outlining its objectives for regulating OTC derivatives, the Treasury cites the need to prevent another economic crisis.

As part of the initiative, the Treasury suggests:

• Creation of regulated central clearinghouses for standardized OTC derivatives;
• Amending the CEA to require the clearing of all OTC derivatives through such central clearinghouses;
• Regulation and supervision of dealers and firms dealing substantially in OTC derivatives, including capital and reporting requirements;
• Transparency of trades on regulated exchanges and reports of trades not cleared by a central counter-party to a regulated trade repository;
• SEC and Commodity Futures Trading Commission (“CFTC”) regulatory and oversight authority; and
• Increased disclosure to investors and/or limitations for marketing OTC derivatives to less sophisticated parties.

Both Chairman Schapiro of the SEC and Acting Chairman Michael Dunn of the CFTC lauded the Treasury’s proposal for OTC derivative regulation, saying that centralization and transparency will strengthen the integrity of the financial system.

For more information, please see: http://www.treas.gov/press/releases/tg129.htm

For statements from the SEC and CFTC, please see: http://www.sec.gov/news/speech/2009/spch051309mls.htm and http://www.cftc.gov/stellent/groups/public/@newsroom/documents/pressrelease/dunnstatement051309.pdf, respectively. 

The SEC announced that for fiscal year 2010, the fees to register securities with the SEC will be set at $71.30 per million dollars. In addition, the fees applicable to most securities transactions will be $12.70 per million dollars.

For more information, please see: http://www.sec.gov/news/press/2009/2009-100.htm                                          

In its ongoing actions against those allegedly involved in the New York State Pension “pay-to-play” scheme, in which the SEC and the New York Attorney General have already brought charges against two government employees for their alleged roles, the SEC has now brought charges against an investment management firm and its principals as well.

The SEC alleges that the investment management firm and its principal agreed to pay a sham finders fee to a shell company owned by one of the state employees in return for hundreds of millions of dollars in investments that were made through the firm. The SEC’s complaint alleges that the investments went to the firm solely based on the firm’s principals’ willingness to pay the government official, and not the actual merits of investing with the firm.

For more information, please see: http://www.sec.gov/news/press/2009/2009-97.htm