SEC CHAIRMAN DISCUSSES ASSET-BACKED INSURERS AND MORTGAGE-RELATED POOLS

The following is an excerpt from the SEC website. The following is from a speech given by Chairman Mary Schapiro of the SEC: Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. August 31, 2011 The next item on our agenda involves two companion releases requesting public comment on the treatment of asset-backed issuers and the treatment of real estate investment trusts and other mortgage-related pools under the Investment Company Act. Treatment of Asset-Backed Issuers Under the Investment Company Act The first of these companion releases is an advance notice of proposed rulemaking regarding Rule 3a-7. That rule, adopted in 1992, provides an exclusion from the definition of “investment company” for certain asset-backed securities issuers. This is important because an entity that is excluded from this definition is exempt from the requirements of the Investment Company Act. To rely on this exclusion, ABS issuers must meet conditions designed to appropriately distinguish these vehicles from mutual funds and other registered investment companies. In addition, the rule contains conditions designed to provide for the safekeeping of assets and some level of independent oversight – both of which are traditional concerns under the Investment Company Act. Also, among the conditions of the rule, are several references to credit rating requirements. We have been examining Rule 3a-7 in the context of the mandate under the Dodd-Frank Act to review and remove credit ratings from our rules and substitute other appropriate standards of creditworthiness. Unlike our other rules, Rule 3a-7 does not use credit ratings to serve as standards of creditworthiness. Instead, the ratings review by the ratings agencies was intended to serve as a type of proxy for addressing traditional investor protection concerns under the Investment Company Act. Our review therefore has focused on substitutes to enhance investor protections, as opposed to substitutes for creditworthiness. In addition, given that the rule is nearly 20 years old, that the asset-backed securities market has experienced tremendous upheaval, and that the primary regulatory regime for asset backed securities is being substantially revised by the Dodd-Frank Act and SEC rulemaking, we are inviting public comment on Rule 3a-7. Among other things, we are requesting comment on ways to update and improve the conditions applicable to the exception for certain asset-backed issuers under the Investment Company Act. We want to assure that our investor protection concerns are appropriately addressed by the rule’s conditions, taking into account various other regulations that are applicable to ABS issuers, including Regulation AB. Among the ideas we discuss is requiring an ABS issuer to undergo an independent review to protect investors in asset-backed securities from self-dealing and overreaching by insiders, in lieu of the credit rating requirement currently in the rule. Treatment of Mortgage-Related Pools Under the Investment Company Act In a companion concept release, we also are requesting public comment on ways to update our interpretation of section 3(c)(5)(C) of the Investment Company Act. That provision is relied upon by some real estate investment trusts, known as REITs, and other mortgage-related pools engaged in the business of acquiring mortgages and mortgage-related instruments. However, certain asset-backed issuers, particularly those backed by mortgages also potentially rely on this provision. So it is helpful and instructive for the Commission to request comment on the treatment of asset-backed issuers and mortgage companies in tandem. In addition, the exception for REITs and other mortgage-related pools under the Investment Company Act is an area of the law that has not received significant focus from the Commission over the years. Indeed, the last time the Commission issued a formal interpretation in this area was in 1960, upon the emergence of REITs. Needless to say, tremendous changes have occurred in the mortgage markets, the securities markets, and the regulatory environment in the intervening five decades. As a result, we are taking this opportunity to seek public input on whether Commission guidance, and the few staff interpretations regarding the status of mortgage-related pools under the Investment Company Act, should be updated or made more clear and comprehensive. We do this with a view that, in some cases, certain REITs and potentially other mortgage-related pools relying on the exclusion can to some investors – particularly retail investors – look very much like traditional investment companies. I look forward to public comments on the nature of the REIT and mortgage markets as well as input on the clarity, scope and even the relevance of our existing guidance.”

SEC FILES INJUNCTION AGAINST BARRED INVESTMENT ADVISOR

September 1, 2011 “The Securities and Exchange Commission announced that it filed a civil injunctive action today in federal district court in Massachusetts against John A. “Jack” Grant (“Jack Grant”), Sage Advisory Group, LLC, a Massachusetts-based investment adviser registered with the Commission, and its sole principal, owner, and employee, Benjamin Lee Grant (“Lee Grant”). The Commission’s complaint alleges that Jack Grant, a lawyer and former stockbroker, has violated and continues to violate a Commission bar from association with investment advisers by associating with his son Lee Grant’s investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleges that Jack Grant, Lee Grant and Sage fraudulently failed to disclose Jack Grant’s barred status and disciplinary history to Sage’s advisory clients. According to the Complaint, the Commission filed a previous enforcement action against Jack Grant in 1988 alleging that he sold $5,500,000 of unregistered securities and misappropriated investors’ funds. At that time, Jack Grant agreed to settle the case and to settle related administrative proceedings that resulted in a July 1988 Order issued by the Commission barring Jack Grant from association with broker, dealers, and investment advisers. Notwithstanding his bar from associating with investment advisers, Jack Grant did not remove himself from the securities business. Jack Grant continued to advise individuals and small businesses on the management of their assets and investments, including prior brokerage customers. He retooled his service as the Law Offices of Jack Grant, and continued providing investment advice, using his son, Lee Grant, to help implement his investment advice. The Complaint alleges that, from at least 1998, Jack Grant has advised clients to invest through his son Lee Grant, who worked first as an associated person of an investment adviser, then as a registered representative of a broker-dealer and, since 2005, as the principal and sole director of a registered investment adviser, Sage. Lee Grant has been fully aware of Jack Grant’s bar from associating with investment advisers, but allowed his association with Sage nonetheless. Jack Grant, Lee Grant, and Sage failed to inform their advisory clients that Jack Grant is barred from associating with investment advisers. They also failed to disclose Jack Grant’s other disciplinary history: his suspension from practicing law for one year, imposed in 1994 following an indictment and conviction for bankruptcy fraud. The Commission’s complaint alleges that Jack Grant, Sage and Lee Grant violated Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”) and that Sage and Lee Grant violated Section 207 of the Advisers Act. The Commission seeks, among other things, the entry of a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of civil monetary penalties against Jack Grant, Sage and Lee Grant. The Commission filed a separate civil injunctive action against Sage and Lee Grant on September 29, 2010, alleging that Sage and Lee Grant made material misrepresentations and omissions to his former brokerage customers in order to induce them to transfer their assets to Sage, his new advisory firm. That action is still pending.”

SEC SEEKS MORE PUBLIC COMMENTS

The following excerpt is from the SEC website: Washington, D.C., Sept. 6, 2011 – The Securities and Exchange Commission today announced that it will seek public comment on a plan to conduct retrospective reviews of its existing regulations. Because today's financial markets are dynamic and fast-moving, the regulations affecting the markets and its participants must be reviewed over time and revised as necessary so that the regulations continue to fulfill the SEC's mission. The SEC has long had formal and informal processes in place to review its existing rules, and a considerable portion of its rulemaking already involves changes to existing rules. Most recently, in March, the Commission began a retrospective review of offering and reporting requirements, and posted a regulatory review webpage seeking public input. The Commission is seeking public comment on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process. Public comments should be received by Oct. 6, 2011. President Barack Obama issued an order on July 11 that recommended that independent regulatory agencies consider how they might best analyze rules that may be outmoded, ineffective or excessively burdensome, and modify, streamline or repeal them. The order also recommends analysis of regulations that might need to be strengthened or modernized, which may entail new rulemaking."

MANIPULATION OF CHINESE PENNY STOCK PRICES LAND U.S. BROKER IN PRISON

The following excerpt is from the Department of Justice website: Tuesday, September 6, 2011 “WASHINGTON - A New York stock broker was sentenced today to 24 months in prison for his role in a wide-ranging international stock fraud scheme involving the illegal use of bulk commercial emails, or “spamming,” to promote thinly-traded Chinese penny stocks, announced A ssistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division and U.S. Attorney Barbara McQuade for the Eastern District of Michigan. Gregg M. S. Berger, 47, of New York, N.Y., was ordered by U.S. District Judge Marianne O. Battani in Detroit to serve three years of supervised release following his prison term. Berger agreed to forfeit $600,000 to the United States. According to court documents, Berger conspired with Alan Ralsky, Francis Tribble, How Wai John Hui, Scott Bradley and others to carry out a sophisticated stock fraud scheme from January 2005 through December 2007. Ralsky, Tribble, Hui and Bradley have all been convicted and sentenced for their roles in the scheme. “Mr. Berger used his position as a stock broker to generate more than $30 million in illegal proceeds for his co-conspirators, and more than half a million dollars for himself,” said Assistant Attorney General Breuer. “Today’s sentence reflects our sustained commitment to ensuring the integrity of our financial markets, and to holding accountable those who try to manipulate them.” “Schemes that manipulate stock prices undermine public confidence in the stock market, and can have serious impact on our economy,” said U.S. Attorney McQuade. “Illegal activity involving the investment industry has brought financial ruin to many Americans. IRS Criminal Investigation is pleased to bring our forensic accounting skills to this joint venture to put a stop to this and other types of white collar fraud,” said Erick Martinez, Special Agent in Charge of the IRS Criminal Investigation Detroit Field Office. Berger was indicted in the Eastern District of Michigan in December 2010 and pleaded guilty in April 2011 to conspiring to commit securities fraud and wire fraud. The charges arose after a multi-year investigation, led by agents from the FBI, with assistance from the U.S. Postal Inspection Service and the Internal Revenue Service (IRS), revealed a sophisticated and extensive operation that largely focused on running a “pump and dump” scheme, whereby the defendants sent spam touting thinly-traded Chinese penny stocks, drove up their stock price, and reaped profits by selling the stock at artificially inflated prices. In pleading guilty, Berger acknowledged that he established brokerage accounts at the direction of Hui and Tribble, and communicated with Ralsky and Bradley during the conspiracy. Berger’s role was to trade the stocks that were illegally promoted by spam email campaigns, arrange for shares of the stocks to be transferred into the brokerage accounts, and execute stock trades at the direction of Tribble, rather than the direction of the named account holders. Berger also caused the transfer of the proceeds from the trading of the stocks to bank accounts controlled by the conspirators. He also provided confidential account information, including trade amounts, prices, cash balances and wire transfer details to Tribble, Bradley and others involved in the scheme who were not entitled to such information and did not have authorization from the actual named account holders. The stocks pumped-and-dumped included China World Trade Corporation (CWTD), Pingchuan Pharmaceutical Inc. (PGCN), China Digital Media Corporation (CDGT), World Wide Biotech and Pharmaceutical Co. (WWBP), China Mobility Solutions (CHMS) and m-Wise (MWIS). According to court documents, during the course of the scheme, Berger caused the sale of approximately 30 million shares of stock, generating approximately $30 million for the co-conspirators and over $600,000 in commissions for Berger. The case was prosecuted by Assistant U.S. Attorney Terrence Berg of the U.S. Attorney’s Office for the Eastern District of Michigan and Senior Counsel Thomas Dukes of the Criminal Division’s Computer Crime and Intellectual Property Section. The case was investigated by the FBI, IRS and U.S. Postal Inspection Service. The U.S. Securities and Exchange Commission’s Philadelphia Regional Office has provided significant ongoing assistance in this case.”

SEC CHAIRMAN SPEECH CONSIDERING SOLICITING PUBLIC COMMENT ON ISSUES RELATIVE TO THE INVESTMENT COMPANY ACT OF 1940

The following speech was given by SEC Chairman Mary Schapiro Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. August 31, 2011 Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on August 31, 2011. Today we will consider whether to issue three separate releases soliciting public comment on issues arising under the Investment Company Act of 1940. The first relates to the use of derivatives by mutual funds and other investment companies regulated under that Act. The next two are companion releases regarding who is considered to be – and not to be – an “investment company” as that term is defined under the Act. In particular, we focus on asset-backed securities issuers and issuers that are in the business of acquiring mortgages and mortgage-related instruments. The derivatives, asset-backed and mortgage markets have undergone significant changes in recent years. And the Commission is taking this opportunity to seek public comment in order to help ensure that our regulatory approach and interpretations under the Investment Company Act remain current, relevant, and consistent with investor protection. Concept Release on Mutual Funds’ Use of Derivatives The first item on the agenda involves the use of derivatives by funds. In March 2010, the Commission announced a staff review of the use of derivatives by mutual funds, exchange traded funds, and other investment companies regulated under the Investment Company Act. That review focuses on the growing use of derivatives by funds and on whether the regulatory guidance surrounding that use can be improved. The concept release we are considering today would inform our review and help us determine whether we should update the regulatory regime for the benefit of fund investors. Background We face this issue today because in 1940, when the Investment Company Act was adopted, derivatives as we now know them did not exist. The Act imposes important leverage, valuation, diversification, and industry concentration requirements to help protect fund investors. However, those limitations were written with stocks and bonds in mind, not complex financial derivatives. As a result, fund investments in derivatives are not always wholly captured by the statutory limitations and requirements. Or if captured, the measures may not be quite right. The controls in place to address fund investments in traditional securities can lose their effectiveness when applied to derivatives. This is particularly the case because a relatively small investment in a derivative instrument can expose a fund to a potentially substantial gain or loss – or outsized exposure to an individual counterparty. The Commission’s approach to the regulation of funds’ use of derivatives has developed on an ad hoc basis as new derivative instruments were introduced and new derivative hedging strategies gained popularity. Current Review of Funds’ Use of Derivatives The current derivatives review gives us the opportunity to re-think our approach to regulating funds’ use of derivatives. We are engaging in this review with a holistic perspective, in the wake of the financial crisis, and in light of the new comprehensive regulatory regime for swaps being developed under the Dodd-Frank Act. But we want public input to help us get it right – input from those who use derivatives, input from those who invest in funds, and input from those who manage funds with derivatives strategies. I very much look forward to commenter input as we continue our in-depth review of the role of derivatives in fund portfolios and improvements that can be made to the regulatory regime.”

COURT ORDERS TRADER ON CME TO PAY NEARLY $2.5 MILLION IN PENALTIES AND RESTITUTION

The following excerpt is from the CFTC website: “Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) announced today that the U.S. District Court for the Northern District of Illinois entered a final default judgment on May 5, 2011, against defendant Carmine Garofalo, an Italian national who purports to reside in Tunisia, requiring him pay $614,925 in restitution and a $1,844,775 civil monetary penalty. The CFTC charged Garofalo with fraud and noncompetitive trading in connection with transactions executed on the Chicago Mercantile Exchange (CME) in March 2010 (see CFTC Press Release 5813-10, April 22, 2010). On August 16, 2011, the court entered a distribution order requiring that funds previously frozen in a personal account held by Garofalo at Interactive Brokers LLC be used to pay restitution and a portion of Garofalo’s civil monetary penalty. The court’s order requires that full restitution of $614,925 be paid to the victim of Garofalo’s fraudulent transactions. The court’s final judgment order finds that Garofalo simultaneously entered trades for his account at Interactive Brokers LLC and an account held at an Italian bank on behalf of a Luxembourg-based client. Garofalo intentionally executed parallel orders to buy and sell E-mini S&P 500 options and Euro/U.S. Dollar European Style Premium options during after-hours trading on the March 5, 2010 trading day -- a period of low volume options trading -- with the purpose of having the opposite orders find and match each other on the CME’s Globex trading platform, the order finds. According to the order, during a 5-hour period on the March 5, 2010 trading day, Garofalo fraudulently executed 168 trades in the account of the client and was successful in matching 119 of the orders with orders placed in his personal account, resulting in a money pass. The CFTC thanks the CME Group, the Italian Commissione Nazionale per le Società e la Borsa, and the U.S. Consulate in Milan, Italy, for their assistance.”