July 14, 1994
TO: COMPLIANCE COMMITTEE NO. 14-94
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 30-94
INVESTMENT ADVISER MEMBERS NO. 34-94
SEC RULES MEMBERS NO. 48-94
RE: SEC SANCTIONS, IMPOSES PERSONAL TRADING PROCEDURES ON FUND
ADVISER
__________________________________________________________
The Securities and Exchange Commission recently sanctioned a
fund adviser, its Chairman, and its Chief Financial Officer with
respect to violations of the Investment Advisers Act and the
Investment Company Act that allegedly occurred between 1987 and
early 1990. One interesting aspect of the Commission's order
consists of the personal trading procedures that the adviser agreed
to adopt (discussed below). A copy of the Commission's order is
attached.
1. Affiliated Transactions
The Commission found that the adviser, aided and abetted by
the officers, failed to disclose trading between the adviser's
clients and an offshore fund affiliated with the adviser, in
violation of the Advisers Act. The Commission also found that the
adviser violated the Investment Company Act by stating in semi-
annual reports that the funds did not engage in securities
transactions with affiliated persons.
The Commission found that the adviser and its Chairman aided
and abetted violations of Section 17(a) of the Investment Company
Act in effecting certain trades between its mutual funds and
between its mutual funds and the offshore fund. These trades
allegedly did not comply with the exemptive provisions of Rule 17a-
7 for the reasons set forth in the Commission's order.
2. Personal Trading Practices
The Commission found that the adviser, aided and abetted by
the officers, misrepresented material facts in its Form ADV, by
stating that persons associated with the adviser are not permitted
to invest in any securities recommended to clients, when the
Chairman and the offshore fund did engage in transactions at the
same time or at a time near to when the securities were recommended
to clients.
3. Procedures to be Adopted by the Adviser
Without admitting or denying the allegations, the adviser and
the two officers agreed to cease and desist from the violations.
The adviser also agreed to comply with various undertakings,
including the adoption of procedures designed to detect and prevent
conflicts of interest in management's trading activities. These
procedures include:
- designation of a compliance officer to preclear trades by
access persons;
- annual dissemination of the fund's personal trading
policy to each access person;
- certification by the access person when preclearance is
sought, as to whether to his or her knowledge any fund or
other account managed by the adviser holds or is
considering the purchase or sale of the securities;
- certification by the access person when preclearance is
sought that the person has read the firm's personal
trading policy within the past year and believes that the
transaction complies with the policy;
- during preclearance, determination by the compliance
officer that the security is not held by any of the
firm's funds or managed accounts and that the firm's
trading desk does not have any unexecuted order to
purchase or sell the security;
- delivery of brokerage confirmations of each access
person's securities transaction to the firm;
- quarterly comparison of the confirmations to the advance
authorizations to determine, among other things, whether
any fund or managed account owned the securities at the
time of the transaction or purchased or sold the
securities within 10 days of the transaction.
The adviser also agreed tat the fund boards would be composed
of at least 5 directors, at least 3 of whom are disinterested. The
adviser consented to reimburse its mutual funds for certain pricing
errors in specified affiliated trades and a six-month prohibition
on accepting new clients.
Thomas M. Selman
Assistant Counsel
Attachment