EILEEN ROMINGER SPEAKS ABOUT INVESTMENTS AND RETIREMENT

The following excerpt is from the SEC website:

"Speech by SEC Staff:
Keynote Address at the Insured Retirement Institute 2011 Government, Legal & Regulatory Conference

byEileen P. Rominger
Director, Division of Investment Management
U.S. Securities and Exchange Commission
Washington, D.C.
June 28, 2011
Thank you for the kind introduction. I am very pleased to be with you today. Before I begin, please note that my remarks here today represent my own views and do not necessarily reflect the views of the Commission, any of the Commissioners, or any other member of the Commission staff.

This is my first occasion to speak to you as Director of the Division of Investment Management. I have been looking forward to this opportunity because, based on my work with the staff so far, I find the area of variable products to be dynamic and challenging. It seems that I have come on board at a critical time of changing landscapes, product innovations, and rapid developments in your industry. It is already clear to me that the variable insurance products industry is wasting no time in tackling what is perhaps the most pressing economic concern of the aging boomer generation: the management of retirement income.

This means that we are seeing a proliferation of new product designs and innovations. Some of these raise substantive regulatory concerns, often driven by the fact that variable separate accounts must operate within the regulatory framework of the Investment Company Act. But even the simpler, more traditional variable contracts we see that do not present significant regulatory issues still face the challenge of clear and useful disclosure, as even the simplest contract designs can be difficult to explain in straightforward plain English. In short, I am struck by the many challenges raised in the regulation of variable contracts. As your industry rises to meet the changing need for retirement income solutions, I look forward to working with you towards our shared goal of protecting the interests of investors.

I would like to review with you a few of the newer product ideas the Division has seen of late and, where appropriate, relate these to some of the broader themes commanding the staff’s attention currently.

I. Insurance Company Control Over Underlying Investments
As you know, the proliferation of so-called living benefit riders in variable annuity contracts has been one of the dominant forces driving contract sales in recent years. Since the market decline in 2008, variable annuities have attracted many investors by virtue of the newer contract benefits – the so-called “living benefit” options offered to owners of variable annuities. These provide insurance with regard to minimum contract values or minimum periodic withdrawals. Of course, these benefits have both direct and indirect costs. First, the investor pays directly for these benefits by way of a charge against contract value, which significantly affects investment performance and reduces the upside potential of the contract. Since 2008, when so many of these benefit riders were “in the money” as a consequence of the recent global financial crisis, the staff has seen many filings reflecting increased fees charged for these benefits.

In addition, purchasers of these optional benefits are facing increasing limitations on investment choices, reflecting an effort by insurers to limit volatility of the investments that are subject to the benefits. For example, variable annuity contracts often prohibit allocations to the more volatile funds, or require participation in a conservative asset allocation model that is designed and maintained with reference to the insurer’s exposure under its living benefit riders. An important staff concern here has been to ensure that investors are apprised of the trade-off involved in such an arrangement. While living benefit riders do provide a measure of protection from a down market, it should be clear to those purchasing the riders that these investment restrictions minimize the likelihood that the riders will ever be “in the money” and actually provide a benefit to the investor, and that such restrictions also may limit the upside potential of the investment.

Many insurers also control underlying investments by implementing so-called “stop-loss” features of the contract. These features typically operate as asset allocation models that move account value among underlying funds pursuant to a formula. Account allocations are changed to more conservative investments, such as government bond funds or money market funds, during declining markets and, in most cases, moved back to the original allocation during periods of sustained market growth. As a disclosure matter, it is important that any ability of an insurer unilaterally to change account allocations be clearly explained. For adequate disclosure, I believe the contract prospectus should set forth the precise parameters under which account allocations may be changed. It should also explain the effects of such changes, such as the possibility of missing a market uptick during a period of fixed income allocations.

On a related topic, underlying funds are frequently managed by advisers that are affiliated with the insurance company. This has been true throughout the history of variable contracts. However, with the proliferation of living benefits under these contracts, the Division has become increasingly concerned about potential conflicts of interest that may result from the fact that the amount of an insurance company’s liability under living benefit riders is directly related to the performance of funds that are managed by its affiliate. Recently, we have begun to see prospectus disclosure acknowledging the conflict, and even indicating that the management of a fund could be influenced by the risk exposure faced by the adviser’s affiliate, the insurance company. Further still, one recent filing disclosed an arrangement under which a fund, which will be a required investment allocation for participants in certain living benefit riders, will be managed through adherence to a formula that uses data provided periodically by the affiliated insurer.

Again, I think it is vitally important in these kinds of arrangements that investors understand the trade-off inherent in an investment of this type. Traditionally, variable annuities offered investors a tax-efficient way to participate in the equity markets, albeit at a cost to cover the insurance company’s mortality and expense risks under the contract’s annuity feature or death benefit. I believe an investor purchasing a living benefit rider should be fully informed of any aspect of the arrangement that could limit the market participation reasonably expected by the investor.

Beyond the disclosure implications here, keep in mind that separate accounts and underlying funds, as investment companies, are subject to the Investment Company Act’s conflict of interest provisions. These were designed by Congress to prevent any overreaching on the part of fund affiliates in their dealings with the fund. From that perspective, I think it is important that the board of directors of any fund that may be subject to conflicting interests on the part of its adviser be vigilant watchdogs for the fund’s investors, ensuring that arrangements entered into are for the benefit of those investors. To accomplish that goal, I believe board deliberations should squarely address any potential conflict on the part of the fund’s adviser and other service providers. Meanwhile, a fund’s adviser and the insurance company that offers a fund on its platform should be careful in formulating arrangements to head off any potential for overreaching in their dealings with the fund.

II. Other Contract Developments
I would like to turn now to some other contract developments. As more and more investors turn their attention from accumulating assets to managing income, we expect to see more new types of annuities, funded by or patterned on instruments that have become popular elsewhere in the marketplace. Two indexed annuities that were recently registered bear similarities to structured notes that lately have garnered a lot of attention both in the media and from the Commission staff. These contracts, if held to term, promise some percentage of the return of a specified equity or commodity index, but provide only very limited downside protection if the contract is surrendered early. In this regard the contracts are similar to certain so-called “structured notes with principal protection.”

On June 2nd of this year the Commission’s Office of Investor Education and Assistance and FINRA jointly issued an investor alert about those instruments, which I commend for your review. It noted that, while these structured products have reassuring names, they are not risk-free, and the terms of such notes related to any protections to or guarantee of principal require a careful review. For example, despite the name “principal protection,” protection levels vary, with some of these products potentially returning as little as 10 percent of principal. The investor alert also pointed out that these products can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. In addition, the products have fees, whether implicit or explicit, even if the sales materials suggest otherwise, which of course will limit returns.

Annuities are a form of insurance, which may suggest safety of an investment simply by virtue of the type of issuer. But annuities patterned on the operation of these structured notes call for caution on the part of investors along the lines set forth in the recent investor alert. The staff’s review of the annuity filings I mentioned earlier focused on effective disclosure of the considerable risk associated with the minimal downside protection. I believe it is important that anyone working towards future filings regarding similar products should do all that you can to prepare disclosure aimed at ensuring that investors are not confused or misled. And I would caution you, as well, that you will be well served by exercising vigilance with respect to the suitability of sales of these products.

III. Disclosure Issues Related to Derivatives
I have already mentioned the need for clear, effective disclosure in variable contract and underlying fund prospectuses. I thought I would take this opportunity to stress one aspect of that theme. As funds are increasingly designed and managed with reference to insurance company obligations under living benefit riders, derivative hedging transactions are likely to play an increasing role in the management of these funds. I would like to speak for a few minutes about the disclosure implications of this trend.

The need for disclosures that clearly inform investors about the specific attributes of derivatives has been highlighted by the staff on multiple occasions, virtually from the beginning of the use of derivatives by funds. Just recently, the Division wrote to registrants regarding observations by the staff that funds’ derivatives disclosures were in many cases generic rather than specific, and did not fully apprise investors of the specific types of investments actually expected to be made. The staff noted that several forms of unhelpful disclosure concerning derivatives are commonplace, including laundry list enumeration of virtually all types of derivatives as potential investments; generic language about potential purposes for using derivatives; open-ended, non-specific disclosures concerning the extent of anticipated derivatives transactions; and, generic risk disclosure regarding derivatives that may or may not relate to the actual risks faced by the fund. The staff also observed that some funds provided extensive and hyper-technical discussions of derivatives which, in practice, bore little relation to the actual operation of the fund. These sorts of disclosure relating to the use of derivatives do not provide investors with useful information regarding the operation and management of the fund.

Addressing these shortcomings, the staff noted that disclosure relating to the use of derivatives should be tailored specifically to the intended management of the fund. The level of detail in the disclosure should correspond to the degree of economic exposure the derivatives create, in addition to the amount invested in a derivative strategy. The staff further noted that disclosure should describe the purpose the derivatives are intended to serve and the extent to which derivatives are expected to be used. For example, if the instruments are to be used for hedging, what are the risks being hedged? If for investment purposes, what are the opportunities contemplated?

Finally, the staff also noted that risk disclosures should be tailored to the types of derivatives used, the extent of their use, and their purpose, as a means of providing investors with a complete risk profile of the fund’s investments, taken as a whole.

IV. Summary Prospectus
I’d like now to turn to a topic that I believe has great potential for the variable insurance industry. In January 2009, the Commission adopted rules providing for an improved mutual fund disclosure framework through the use of a summary prospectus. Briefly, the summary prospectus option provides for a concise and user-friendly, plain English document for fund investors containing key information about the fund’s investment objectives and strategies, risks, costs, and performance. More detailed information is available both in paper form and also online in a format that facilitates direct movement between concise information in the summary prospectus and more detailed information in the statutory prospectus.

It has now been over two years since the Commission adopted the summary prospectus option. In that time, the staff has seen an encouraging number of summary prospectus filings. As of March 31, almost 70% of mutual funds had opted to file summary prospectuses with the Commission. Those who worked on the initial submissions should be commended for a strong implementation effort. I encourage you to listen to your investors and to the various parties in the chain of distribution so that you can fine-tune these documents and craft truly effective summary disclosure in this streamlined format.

As the staff gains experience with the mutual fund summary prospectus, we are continuing to consider a similar disclosure framework for variable annuities. In particular, we are studying the feasibility of a summary prospectus for variable annuities that would provide investors with key information in a clear and concise format.

The challenges, of course, are many. Variable annuities can be difficult to understand. They often have complicated features, not the least of which are the living benefit riders I discussed earlier, and they often have complex fee structures.

Disclosure about these products is further complicated because insurers may modify features of existing contracts as time goes on. As a result, any given variable annuity prospectus may include disclosure about features that are no longer available to current purchasers but may remain available to contract owners who purchased their contracts in the past.

While these factors make our task of developing more user-friendly disclosure for variable annuity investors very challenging, they also make the task all the more important. I believe it is essential that investors be provided with clear disclosure and have ready access to the information they need to make well-informed investment decisions because of the central role that variable products play in the financial plans of so many investors, especially those who are in or approaching their retirement years.

We have received valuable input from the IRI and other industry representatives on the topic. I appreciate the industry’s active involvement and willingness to help the staff work through the challenging issues raised by this initiative and encourage your continued involvement as we continue to study improved disclosure in the variable annuity context."

SPEECH BY SEC CHAIRMAN MARY L. SCHAPIRO

The following is an excerpt from the SEC website:

"Remarks Before the American Securitization Forum 2011 Annual Meeting
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Chairman Mary L. Schapiro
Washington, D.C.
June 22, 2011
It is a pleasure to be here today. We share a concern about the future of the mortgage securitization market and, in particular, the private label market that has almost wholly evaporated in the last three years.

In the years leading up to the financial crisis, the nearly $10 trillion securitization market provided liquidity to almost every sector of the economy: from residential real estate to student loans to credit card debt. Lenders were able to make new loans and credit available to a wide range of borrowers and companies seeking financing. In conjunction with low interest rates and rising home prices, securitization helped fuel the real estate boom of the last decade.

In the area of mortgage-backed securities, sound underwriting practices often took a back seat to immediate profits, however, and underwriting standards deteriorated. When home prices stalled and declined, poorly underwritten mortgages began to default and the securities backed by the mortgages lost their value.

The result was a broad crisis in the securitization market, whose aftereffects are still being profoundly felt. Nearly every RMBS offered in 2010 was federally backed and only one publicly registered residential mortgage-backed securities transaction completed an offering last year.

As one research consultant put it in Monday’s Wall Street Journal: “investors are on strike.” In the aftermath of the crisis, would-be investors are waiting for needed reforms in the securitization market before they are willing to wade back in.

But efforts to implement the reforms that would bring investors back to the markets are being met with strong and what I believe to be short-sighted resistance.

Look at the numbers: while other asset classes have recovered to varying degrees, the volume of registered RMBS has fallen from $609 billion in 2006 to just $231 million last year. In addition, the number of unregistered, or 144A-eligible ABS, has fallen to a fraction of the volume offered in 2004. Those figures will not significantly improve until investors again feel confident – and that confidence will only come with better standards.

I am sure that today few if any industry professionals, would ignore the lessons of the last few years and assume the risks that enabled the mortgage crisis.

As time passes, though, memories fade. An improving economy makes risks seem smaller while the pressure to assume risk in search of profits can rise. And people have an almost infinite ability to convince themselves that “this time it’s different.” Eventually, conditions accumulate for another crisis like underbrush in a dry forest, waiting for a spark to touch them off.
And so it is important to translate lessons learned at great cost into permanent reform while memories are still fresh. This was a driving force behind the Dodd-Frank Act, and for the securitization rulemakings that we at the SEC have undertaken separately.

SEC Priorities

While there were a number of factors contributing to the securitization slowdown, there are three areas of particular concern to the SEC:

Lack of accountability among participants in the securitization chain.
Flawed credit ratings.
Investors’ lack of tools and information to value the securities properly.


Each of these problems has eroded investor confidence, and without willing investors, the securitization markets cannot possibly come back. I’d like to discuss each in turn and what the SEC can do about them.

Lack of Accountability

One of the root causes of the mortgage crisis was that many originators were not accountable for the loans they made, loosening underwriting standards and passing off the entire credit risk to investors through securitization. It is no wonder that investors remain wary.

As you know, Congress sought to address this concern through the risk retention requirements in the Dodd-Frank Act. In March 2011, the Commission, along with federal banking and housing agencies, proposed rules that push accountability further up the securitization chain. These rules would require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party.

The proposed rules take into account the heterogeneity of securitization markets and practices and reduce the potential for negative impacts on the availability and cost of credit, by offering the sponsor a menu of options with which to satisfy its risk retention requirements.

The public comment period on this proposal has been extended to August 1, and we look forward to reviewing your comment letters. I am aware of concerns regarding the proposed premium capture cash reserve account.

And I encourage commentators on that aspect of the proposal to recommend revisions or alternatives that would still ensure that the issuer does not avoid the requirements by structuring around an option to retain risk.

Another provision of Dodd-Frank requires issuers to undertake a review of the assets underlying the ABS and to disclose the nature of the review and the review’s findings and conclusions. Our rules implementing this requirement establish a minimum standard of review, which should increase the issuer’s accountability for the assets placed in the pool.

We also are concerned with accountability for representation and warranty mechanisms built into underlying transaction agreements. Many of these reps and warranties have proven to be ineffectual, frustrating investors attempting to assert their rights.

One way to provide better assurance that the assets whose credit risk investors purchase meet the criteria required under the contractual provisions is through our fast-track “shelf eligibility” requirements. As you know, the commission proposed ending reliance on investment grade ratings in determining shelf-eligibility early last year, an idea subsequently incorporated into Dodd-Frank as well.

Instead, the Commission proposed requiring a new provision in pooling and servicing agreements that address representations and warranties violations. This provision would require that an independent third party periodically furnish an opinion regarding the obligated party’s decisions to repurchase or not to repurchase any loans that the trustee put back to the obligated party for violation of the representations and warranties.

A number of commentators felt that this proposal was too “clunky” and that a third party opinion would not be an effective means of fully resolving disputes. I continue to believe that some type of mechanism to better redress breaches of representations and warranties and give real meaning to this important investor protection is very important to investors in asset-backed securities. Our staff is currently working to address commentators’ concerns while still achieving this goal.

The necessity of balancing risk and reward is a key to rational investment decisions and a linchpin of market self-regulation. Aligning the interests of originators, securitizers and investors by ensuring that entities at every step in the securitization process are accountable for the risks they assume and pass on will make the market more stable and rational.

Flawed Credit Ratings

A second weak link in the securitization chain was the failure of rating agencies to adequately detect problems in the securities which they rated – magnifying the dangers of the inadequate underwriting practices increasingly adopted by originators. Here again, it was people and institutions who invested in these securities who ultimately suffered the bulk of the harm resulting from failures occurring earlier in the securitization process.

As the Financial Crisis Inquiry Commission noted, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval … This crisis could not have happened without the rating agencies.”

The ultimate effect of flawed ratings was exacerbated by over-reliance on ratings throughout the market and the sheer number of instruments receiving high ratings. On one hand, fixed-income investors in search of low-risk vehicles and institutions required by state and federal laws – or by their own investment criteria – to hold highly-rated securities could choose between only a small handful of corporate issuers with Triple A ratings.

On the other hand, as late as January, 2008, 64,000 asset-backed securities were rated Triple A.

Unfortunately, as the Senate Investigations Subcommittee found, “Over 90% of the AAA ratings given to subprime RMBS originated in 2006 and 2007, were later downgraded by the credit rating agencies to junk status.”

The Commission currently is pursuing reforms aimed at improving transparency and the credit rating process.

On May 18, the Commission issued a series of proposals to establish new requirements for credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs).

These proposed rules, stemming from the Dodd Frank Act, would:

Give market participants access to important information about providers of third party due diligence services and their findings regarding the assets underlying securities.
Require a provider of third-party due diligence services for an asset-backed security to provide a certification that includes their findings and conclusions to any NRSRO that is producing a credit rating for the security. The NRSRO would, in turn, be required to disclose any certifications it receives.
Increase the amount of information an NRSRO must disclose about the assumptions behind, and limitations of, its credit ratings, and about the performance of its credit ratings for different classes of asset-backed securities.


These proposals follow two separate sets of rulemakings issued in 2009, in which the Commission added new requirements for NRSROs that included:

Requiring new disclosure by NRSROs regarding whether and how they rely on the due diligence of others to verify the assets underlying a structured product.
Prohibiting NRSROs from structuring the same products that they rate.
Requiring an NRSRO that is hired by issuers, sponsors, or underwriters to determine an initial credit rating for a structured finance product to disclose to other NRSROs that it is in the process of determining such a credit rating.
Requiring an NRSRO to obtain representations from the issuer, sponsor, or underwriter that it will provide the information it provided to the hired NRSROs to other NRSROs as well.

Investors, too, can play a role in reducing reliance on rating agencies and facilitating increased competition among rating agencies, which should help to improve ratings and which was a goal of the Credit Rating Agency Reform Act of 2006.

That Act’s overarching goal as stated in its legislative history was to “improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency and competition in the credit rating industry.” I encourage institutional investors to revisit their organizational documents that delineate the criteria for investments.

If your documents require a specific rating by a specific rating agency I urge you to revisit it. If investors are not allowed to invest in securities rated by new NRSROs, how will more competition that may improve the quality of ratings develop?

Ratings should serve as a check on originators and issuers of RMBS, and be an additional source of accurate risk assessment for investors. In a world where risk cannot be measured exactly, these reforms should at least ensure that investors have an opportunity to evaluate ratings against a backdrop of third-party findings and improved rating agency practices.

Investor’s Lack of Tools and Information

Realistic analysis of risk by investors is a key component of stable and efficient markets.

However, investors must have access to accurate and useful information. Unfortunately, as the mortgage bubble expanded, investors over-relied on ratings even as market discipline declined.
I remember that when Regulation AB was adopted in 2004, the Commission and its staff endured a lot of criticism and accusations of over-regulation – accusations which look pretty absurd in hindsight. Unfortunately, today, we are hearing echoes of that earlier criticism.

With proper information, investors actually become partners in the pursuit of stable markets. This is why I believe that improving the quality and timing of disclosure to investors will have the most beneficial impact on this market of any of the reforms now underway.

In April, 2010, the SEC proposed changes to Regulation AB that would transform a one-dimensional system into a vastly more transparent system that that allows investors in ABS to more easily and efficiently assess the securities and the underlying assets.

As proposed, this transparency would include:

Standardized terms and definitions, so that investors can easily compare the assets underlying different offerings.
Pool characteristics provided on a granular basis, with issuer discussion of exception loans.
Timely investor access to transaction agreements.
Sufficient time for investors to process the information.

The April 2010 proposal also included several other significant changes to Regulation AB, requiring:


A computer program of the contractual cash flow provisions of the securities.
Enhanced descriptions relating to static pool information, such as a description of the methodology used in calculating the characteristics of the pool performance.
Static pool information for amortizing asset pools that comply with the Regulation AB requirements for the presentation of historical delinquency and loss information.
The filing of Form 8–K for a one percent or more change in any material pool characteristic from what is described in the prospectus, rather than for a five percent or more change, as currently required.
Provisions of the Dodd-Frank Act also address the need to put better information in investors’ hands. Issuers will be required to report on the performance of the underlying assets and the securities on an ongoing basis, rather stopping after a single annual report.

And rules adopted under Section 943 require disclosure related to representations and warranties in ABS offerings, which will shine needed sunlight on underwriting practices and the responsiveness of sponsors.

Investor decisions ultimately drive the financial markets. When investors do not have the proper tools and information to make sound decisions, the consequences can be dire: for investors’ accounts, for capital allocation, for the financial markets and for the economy as a whole.

Ensuring access to detailed information and time enough to analyze it, is an effective and a cost-effective way to bring vitality to the ABS markets.

I am determined that we will pursue and require the greatly enhanced disclosure in this market that investors must have, in the near term.

What’s Next?

For all the progress we have made, there is still a great deal of work ahead of us.

We will be re-evaluating our April 2010 AB proposals in light of the changes brought about by the Dodd-Frank Act, and I expect we may re-propose a few of these, such as the tests for shelf eligibility.

In addition, I look forward to a constructive dialogue dedicated to improving the information available to investors in the unregistered market. I know there is some concern about our proposal to impose registered offering disclosures in the Rule 144A market, particularly with respect to asset classes that have not historically been offered on a registered basis so that there aren’t explicit requirements to import from registered deals to Rule 144A deals.

But I believe it is important for us to address concerns about information gaps in the unregistered markets and we should be able to craft a regulatory solution that appropriately balances the competing concerns.

Conclusion

As we work to finalize our rules, I want to thank you for your comments on our proposals and ask you to continue to work with us to address concerns.

We believe that the weaknesses we have identified in the ABS market can best be addressed by embracing the SEC’s investor protection role and reinforcing building blocks of stable markets: accountability; improved performance by the rating agencies; and better information for investors.

Although our reform initiatives are the result of lessons learned only a short time ago, it does sometimes seem that memories are fading. While we are focused on the current weaknesses in the securitization market, we aim to adopt rules that support a market that functions not just in the near term, but also when markets heat up. We should not weaken reform for short-term gain.

Investors will return to the market when a structure for long-term strength and stability is in place, and they can be confident that the interests of other participants are aligned with their own and that the information they need is available and accurate.

There is and should be a healthy debate about how precisely to implement effective regulation. But I believe that we can all agree that important reforms that make this market healthier and more stable are essential to the securitization markets’ recovery.

Thank you."

SEC CHARGED RAYMOND JAMES & ASSOCIATES INC. WITH MAKING INACCURATE STATEMENTS

The following excerpt comes from the SEC website:

“Washington, D.C., June 29, 2011 — The Securities and Exchange Commission today charged Raymond James & Associates Inc. and Raymond James Financial Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers.

Raymond James agreed to settle the SEC’s charges and provide its customers the opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS market in February 2008.
According to the SEC’s administrative order, some registered representatives and financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to money market funds and other cash-like investments. In fact, ARS were very different types of investments. Among other things, representatives at Raymond James did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity.
“Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Harmed investors who are covered by this settlement will have the opportunity to get full payment for their illiquid ARS.”
The SEC previously announced ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank, and TD Ameritrade. As a result of these settlements, more than $67 billion has been returned to ARS customers following the SEC’s investigation into the ARS market collapse of February 2008 that left tens of thousands of investors holding ARS they could not sell.
The SEC’s order against Raymond James finds that the firm willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm.
Without admitting or denying the SEC’s allegations, Raymond James consented to the SEC’s order and agreed to:
Offer to purchase eligible ARS from its eligible current and former customers.
Use its best efforts to provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers.
Reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after Feb. 13, 2008.
Compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest.
At the customer’s election, participate in a special arbitration process with those eligible customers who claim additional damages.
Establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.
Investors should be alerted that, in most instances, they will receive correspondence from Raymond James. Investors must then advise Raymond James that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to Raymond James. Investors should review the full text of the SEC’s order, which includes the terms of the settlement.
The Commission acknowledges the assistance and cooperation of the State of Florida Office of Financial Regulation, the Texas State Securities Board, and the North American Securities Administrators Association.”

Although financial penalties are becoming more common in cases like the one above criminal penalties are not really increasing. The problem is that it is hard to link upper levels of management with a business decision to commit a crime. A word used like “puffery” when selling a product is often confused with the word “fraud” by over zealous salespeople who are trying to earn a commission or large bonus check and pay their bills. Commission sales by definition; means that Salespeople are paid by their employers to talk up their products and overcome objections. This is a slippery slope and top management is responsible for making sure those directly offering the products to the public do not slip off the “slippery slope” and say things that might earn a nice check now but in the long run will seriously harm the reputation of the firm they are working for.

SEC LARGE FINANCIAL COMPANY WITH MAKING INACCURATE STATEMENTS

The following excerpt comes from the SEC website: “Washington, D.C., June 29, 2011 — The Securities and Exchange Commission today charged Raymond James & Associates Inc. and Raymond James Financial Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers. Raymond James agreed to settle the SEC’s charges and provide its customers the opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS market in February 2008. According to the SEC’s administrative order, some registered representatives and financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to money market funds and other cash-like investments. In fact, ARS were very different types of investments. Among other things, representatives at Raymond James did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity. “Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Harmed investors who are covered by this settlement will have the opportunity to get full payment for their illiquid ARS.”
The SEC previously announced ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank, and TD Ameritrade. As a result of these settlements, more than $67 billion has been returned to ARS customers following the SEC’s investigation into the ARS market collapse of February 2008 that left tens of thousands of investors holding ARS they could not sell. The SEC’s order against Raymond James finds that the firm willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm. Without admitting or denying the SEC’s allegations, Raymond James consented to the SEC’s order and agreed to: Offer to purchase eligible ARS from its eligible current and former customers. Use its best efforts to provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers. Reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after Feb. 13, 2008.
Compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest. At the customer’s election, participate in a special arbitration process with those eligible customers who claim additional damages.
Establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.
Investors should be alerted that, in most instances, they will receive correspondence from Raymond James. Investors must then advise Raymond James that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to Raymond James. Investors should review the full text of the SEC’s order, which includes the terms of the settlement. The Commission acknowledges the assistance and cooperation of the State of Florida Office of Financial Regulation, the Texas State Securities Board, and the North American Securities Administrators Association.”
Although financial penalties are becoming more common in cases like the one above criminal penalties are not really increasing. The problem is that it is hard to link upper levels of management with a business decision to commit a crime. A word used like “puffery” when selling a product is often confused with the word “fraud” by over zealous salespeople who are trying to earn a commission or large bonus check and pay their bills. Commission sales by definition; means that Salespeople are paid by their employers to talk up their products and overcome objections. This is a slippery slope and top management is responsible for making sure those directly offering the products to the public do not slip off the “slippery slope” and say things that might earn a nice check now but in the long run will seriously harm the reputation of the firm they are working for."

SEC APPROVES RULE TO DEFINE "FAMILY OFFICES"

The following is an excerpt from the SEC website:

Washington, D.C., June 22, 2011 — The Securities and Exchange Commission today approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.

The rulemaking stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.

The rule is effective 60 days after its publication in the Federal Register.

# # #

FACT SHEET
Defining A Family Office
How are family offices impacted by the Dodd-Frank Act?
Family offices typically are considered to be investment advisers under the Advisers Act because of the investment advisory services that they provide. As such, they are subject to the registration requirements set forth in that Act. Historically, however, most family offices have been structured to take advantage of an exemption from registration for firms that advise less than fifteen clients and meet certain other conditions.

The Dodd-Frank Act repeals the 15-client exemption to enable the SEC to regulate hedge fund and other private fund advisers. But, the Dodd-Frank Act includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

Today, the Commission is considering adopting a final rule defining family offices that will be excluded from regulation under the Advisers Act.


Which family offices will be excluded from Advisers Act regulation under the rule?

Any company that:

Provides investment advice only to “family clients,” as defined by the rule.

Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.

Does not hold itself out to the public as an investment adviser.
Which family members and employees can the family office advise under the exclusion?

Family members. Family members include all lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members), and such lineal descendants’ spouses or spousal equivalents.

Key employees. Key employees include:


Executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office.

Any other employee of the family office or its affiliated family office (other than a clerical or secretarial employee) who, in connection with his or her regular duties, has participated in the investment activities of the family office or affiliated family office, or similar functions or duties for another company, for at least 12 months.

Other family clients. Other family clients generally include:


Any non-profit or charitable organization funded exclusively by family clients.

Any estate of a family member, former family member, key employee, or subject to certain conditions a former key employee.

Certain family client trusts.

Any company wholly-owned by and operated for the sole benefit of family clients.
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?

By March 30, 2012.

Will existing family office exemptive orders be rescinded?

No. Family offices that obtained exemptive orders from the Commission will be able to continue operating under their existing exemptive orders or they may operate under the new rule.

When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?

That family office will have to obtain a Commission exemptive order or register as an investment adviser.

Grandfathering Provision

The Dodd-Frank Act requires that the Commission not preclude certain family offices from meeting the new exclusion solely because they provide investment advice to certain clients (and provided that advice prior to January 1, 2010). The adopted rule incorporates this grandfathering provision."

SPEECH BY SEC COMMISSIONER KATHLEEN L. CASEY AT SEC OPEN MEETING

The following is a speech given by SEC Commissioner Casey and is an excerpt from the SEC website:

"Speech by SEC Commissioner:
Statement at SEC Open Meeting — Rules Implementing Amendments to the Investment Advisers Act of 1940; Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers
by
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
Washington, D.C.
June 22, 2011
As always, I join the Chairman in thanking the Staff of the Division of Investment Management, and all other participating divisions and offices, for their work on these releases.

I am able to support the adoption of only one of the two releases presented: the rules defining the scope of three exemptions to registration under the Advisers Act. As has been stated, the Dodd-Frank Act required that the Commission, via rulemaking, define the scope of exemptions from registration for certain types of advisers.

The rule defining “venture capital fund” for purposes of one of these statutory exemptions is particularly significant. The legislative record is replete with evidence that Congress did not regard venture capital funds as posing the kinds of risks that justify registration under the Advisors Act and indeed, was concerned with burdening these important drivers of capital formation and economic growth.

While I believe that our definition of venture capital fund could have been broader, I am ultimately able to support this rule because I believe it recognizes the need for flexibility in these funds’ investment strategies. Importantly, facilitating that flexibility via the basket of non-conforming activity seeks to ensure that funds are not unjustifiably prevented from making the most advantageous investments and from responding to changing market conditions in an efficient way. But at the same time, the rule also seeks to fulfill Congress’s intent that this exemption be applicable to venture capital fund advisers only.

I am, however, unable to support adoption of the companion release which sets out the Advisors Act implementation rules because, as I stated when I opposed the release as proposed, I believe that these rules will needlessly harm innovation and capital formation without a demonstrated, articulable, or measurable benefit to investors or financial stability.

As a consequence of the requirements imposed under the implementing rules, there will be no meaningful relief from the burdens of registration for those advisers that will be able to fit themselves within the boundaries of the Advisers Act exemptions we define today. Venture capital fund advisers, along with mid-sized private fund advisers, although explicitly exempt from registration under the Dodd-Frank Act, have been designated under the rules’ framework to be “exempt reporting advisers,” and are therefore subject to many of the same requirements as registered advisers, including public reporting requirements, and eventually recordkeeping obligations, just as if they were registered.

The Commission today pays lip service to the idea that it must maintain some difference between the reporting requirements imposed on exempt advisers and those for registered advisers, and therefore only adopts a certain subset of the items on Form ADV as applicable to exempt reporting advisers.

To be clear, my disagreement with the reporting requirements is not a mere quibble with which and how many Form ADV items are being required. Instead, I am deeply concerned by the wholesale lack of any principled, meaningful distinction drawn in the release between exempt advisers and registered advisers. Indeed, I believe it is not simply a function of degree, but of design. That is to say, I believe that the adoption of the current reporting requirements is only the first step in what will surely be an ongoing process of emptying the distinction between an “exempt reporting adviser” and a “registered” adviser of all meaning.

While the proposing release alluded to the possibility of future additional requirements, the adopting release is not as coy, and clearly refers to the prospect of future regulations, predicting not only a future recordkeeping rule but also explicitly signaling the Commission’s prerogative and intent to further expand the Form ADV and examination obligations. Indeed, the tenor of the release is such that it can only be assumed that the ultimate goal is to promote registration of these funds by nullifying any benefit of exemption through the imposition of comparable regulatory and compliance requirements.

So why does this matter? It matters first because the Commission has failed to meaningfully implement the will of Congress that these advisers be exempt from registration.1 It is true that Congress gave us the authority to require certain reporting and recordkeeping “as the Commission determines are necessary or appropriate in the public interest or for the protection of investors.” But the release before the Commission today provides no substantiated justification on public interest or investor protection grounds for the decision to impose these reporting requirements. Given that Congress instructed us to make these kind of findings before imposing additional requirements on these exempt advisers, the presumptions contained in the release as to the usefulness of the required information are entirely insufficient to meet our statutory obligations.

But more fundamentally, these rules needlessly impose compliance costs on funds that are the incubators of tomorrow’s great companies, companies that our economy necessarily relies on to propel job growth. This, at a time, when policymakers and Congress continue to emphasize the importance of finding ways to further promote capital formation and economic growth.

But we don’t need a white board to contemplate how to promote capital formation — we can start right here by not unnecessarily hampering it. Every dollar that is spent by a venture capital fund to satisfy the Commission’s newly imposed regulatory requirements is a dollar that cannot be invested in the next Google, Apple, or Amazon. These dollars will never reach nascent companies that are developing green tech, cutting-edge biotechnology, or products that are even beyond our dreams today.

I fear here that the Commission has lost sight of the fact that its mission includes the mandate to facilitate capital formation. The implementation rules before the Commission today will, without a doubt, negatively and unduly impact capital formation and economic growth. As a result, I cannot support it.

Thank you and I have no questions.


1 As explained in the legislative history, Section 407 of the Dodd-Frank Act directs the Commission to define "venture capital fund," and "provides that no investment adviser shall become subject to registration requirements for providing investment advice to a venture capital fund." S. REP. NO. 111-176, at 74, 75 (2010)."