The New Era of Enforcement & Compliance-Bank Secrecy Act, Anti-Money Laundering and More

562 Pages·2005·15.34 MB·English

PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Chronology of Revenue Sharing Settlements

Company Regulator Date Conduct Alleged Charges Settled Disgorgement Penalty
and Case
Number
Morgan Stanley SEC 11/17/03 Failed to provide adequate disclosure to customers • § 17(a)(2) of Securities Act $25 million $25 million
DW Inc. purchasing mutual fund shares regarding conflicts of
Securities • Rule 10b-10 under Exchange Act (distributed to (distributed
interest arising from MSDW’s receipt of increased
(broker-dealer) Exchange customers) to customers)
compensation for sales of “preferred” funds. • NASD Rule 2830(k)
Act Release
(Settlement also resolves § 17(a)(2) and Rule 10b-10
No. 48789
charges relating to inadequate disclosure regarding sales
of Class B shares of proprietary mutual funds.)
Morgan Stanley NASD 11/17/03 Violated prohibition on favoring distribution of mutual • NASD Rule 2830(k)(1), (3), (6)
DW Inc. funds based on brokerage commissions and violated
AWC No.
prohibition on permitting sales personnel to share in
(broker-dealer) CAF030060
directed brokerage commissions.
Massachusetts SEC 3/31/04 Failed to effectively communicate to Funds’ board of • § 206(2) of Advisers Act $1 $50 million
Financial Services trustees and shareholders conflict of interest arising
Advisers Act • § 34(b) of Investment Company Act (distributed
Company from “strategic alliances” with broker-dealers under
Release No. to funds)
which MFS used directed brokerage to pay for “shelf
(adviser) 2224
space.”
PA Fund SEC 9/15/04 Failed to disclose to Funds’ board of trustees and • § 206(2) of Advisers Act and aiding and abetting $6,602,000 $4 million
Management shareholders conflicts of interest arising from use of such violations (PAFM and
Advisers Act (jointly paid to
(adviser), PEA directed brokerage to pay for “shelf space” with selected PAD)
Release No. • §§ 15(c), 17(d), 34(b) and Rule 12b-1(d), and 17d- funds based on
Capital (sub- broker-dealers.
2295 1 of Investment Company Act and aiding and brokerage $1 million
advisor), and PA
abetting violations of § 12(b) and Rule 12b-1(b) commissions (PEA)
Distributors (broker-
used to pay for
dealer, underwriter-
shelf space)
distributor)
1 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator Date Conduct Alleged Charges Settled Disgorgement Penalty
and Case
Number
PA Distributors California 9/15/04 Failed to adequately disclose “shelf space” payments • Antifraud provisions of Cal. Corp. Sec. Law of $4 million $5 million
AG and conflicts of interest created by deals made with 1968
(broker-dealer, (reimbursement (paid into
broker-dealers to sell funds.
underwriter- Press Release for costs) state general
distributor) and fund)
Settlement
Agreement
Franklin Advisers SEC 12/13/04 Failed to adequately disclose “shelf space” agreements • § 206(2) of Advisers Act and aiding and abetting $1 $20 million
and and use of brokerage commissions (fund assets) to make such violations
Advisers Act ($10 million
Franklin/Templeton payments under such agreements.
Release No. • § 17(d) and Rule 17d-1 of Investment Company each)
Distributors
2337 Act and aiding and abetting such violations
(distributed
(adviser and broker-
• § 34(b) of Investment Company Act to funds)
dealer/distributor)
Edward D. Jones & SEC 12/22/04 Failed to adequately disclose “shelf space” payments • § 17(a)(2) of Securities Act $37.5 million $37.5 million
Co., L.P. and conflicts of interest created by receipt of increased
Securities • § 15(B)(c)(1) and Rule 10b-10 of Exchange Act. (distributed to (distributed
compensation for sales of “preferred” mutual funds and
(broker-dealer) Act Release customers) to customers)
529 college savings plans. • Rule G-15 of Municipal Securities Rulemaking
No. 8520
Board
Edward D. Jones & NASD 12/22/04 Failed to adequately disclose revenue sharing payments • NASD Rules 2110, 2210,2820(g), 2830(k)(1), (3),
Co., L.P. received from select group of mutual fund companies. (6), 2830(l), 3010, 3110
AWC No.
Failed to ensure communications with public, including
(broker-dealer) CAF040115
websites and written documents, were fair and balanced,
and did not omit important facts. Improperly favored
the sale of mutual funds on the basis of brokerage
commissions. Failed to retain emails. Failed to
supervise preferred fund program, revenue sharing
agreements, directed brokerage, sales contests,
preservation and retention of emails, and late trading.
2 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

3 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Chronology of Market Timing and Late Trading Settlements

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Canary Capital NYAG 9/3/03 Hedge fund engaged in a scheme to • N.Y. Gen. Bus. Law §§ 352-c(1)(a), $30 million $10 million
Partners defraud mutual fund shareholders through 352-c(1)(c), 352-c(2)
Press Release
market timing and late trading.
Only • N.Y. Exec. Law § 63(12)
Putnam SEC partial 11/13/03 Failure to disclose self-dealing market • §§ 203(e)(6), 204A, 206(1), 206(2) of TBD TBD
Investment settlement timing by employees and failure to Advisers Act
Management adequately detect and deter such activity.
Advisers Act • § 17(j) and Rule 17j-1(c) of Investment
Release No. Company Act
2192
Alliance Capital SEC 12/18/03 Entered into agreements to allow market • §§ 204A, 206(1), 206(2) of Advisers $150 million $100 million
Management (amended timing in its funds in exchange for “sticky Act
Advisers Act (paid to SHs) (paid to SHs)
1/15/04)1 assets” to increase management fees.
Release No. • §§ 17(d), 20(a), 34(b) and Rules 17d-1,
2205A 20a-1 of Investment Company Act
Alliance Capital NYAG 12/18/03 Entered into agreements to allow market Not specified in release. 20%
Management timing in its funds in exchange for “sticky reduction for
Press Release
assets” to increase management fees. 5 years
Only
(est. $70
million/yr)

1 The amended settlement corrects several typographical errors and set a deadline for implementing the governance policies and practices (listed in the prior draft as already having been implemented).
1 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Massachusetts SEC 2/5/04 Permitted certain customers to market time • § 34(b) of Investment Company Act $175 million $50 million
Financial Services in mutual funds, despite policy against
Advisers Act • § 206(1) and (2) of Investment Advisers (paid to SHs) (paid to SHs)
Company market timing.
Release No. Act
2213
Massachusetts NYAG 2/5/04 Permitted certain customers to market time Not specified in release $125 million
Financial Services in mutual funds, despite policy against reduction
Press Release
Company market timing. (over 5
Only
years)
Massachusetts NH AG 2/5/04 Permitted certain customers to market time Not specified in release $1 million
Financial Services in mutual funds, despite policy against
Press Release (for NH and
Company market timing.
Only national
investor educ.)
Banc of America SEC 3/15/04 Permitted market timing in certain mutual Not specified in release. $250 million $125 million
funds and facilitated market timing and late
(Settlement in Press Release (paid to mutual (paid to mutual
trading by certain customers.
principle) Only fund & SHs) fund & SHs)
Banc of America NYAG 3/15/04 Permitted market timing in certain mutual Not specified in release. $160 million
funds by certain customers. reduction
Press Release
over 5 years
Only
(as merged
entity with
FleetBoston)
2 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
FleetBoston SEC 3/15/04 Columbia Management Advisors and Not specified in release. $70 million $70 million
Financial Columbia Funds Distributors (subs of
Press Release (paid to SHs) (paid to SHs)
(Columbia FleetBoston) permitted certain customers
Only
Advisors and to market time in mutual funds in exchange
Columbia for sticky assets, despite policy against
Distributors) market timing.
FleetBoston NYAG 3/15/04 FleetBoston, Columbia Management • N.Y. Gen. Bus. Law §§ 349, 352- $160 million
Financial Advisors, and Columbia Funds Distributors c(1)(a), 352-c(1)(c), 352-c(2) reduction
Press Release
(FleetBoston’s subs) permitted certain over 5 years
Only • N.Y. Exec. Law § 63(12)
customers to market time in mutual funds (as merged
in exchange for sticky assets to increase entity with
management fees. Bank of
America)
Putnam MA Secretary 4/8/04 Failure to disclose self-dealing market • Mass. Gen. Laws ch. 110A, §§ 101 and $5 million
Investment of State timing by employees and failure to 102
(paid to funds)
Management adequately detect and deter such activity.
Offer of
Settlement
3 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Strong Capital SEC 5/20/04 Entered into agreements with certain • §§ 204A, 206(1), and 206(2) of $40 million $40 million
Management, Inc., customers to permit market timing, in Investment Advisers Act
Advisers Act (paid to (paid to
Strong Investor violation of market timing policies, in
Release No. • § 34(b) of Investment Company Act investors) investors)
Services, Inc., and exchange for “sticky assets” to increase
2239
Strong management fees. Failed to disclose
Investments, Inc. conflict of interest created by such
arrangements to trustees and shareholders.
Strong Financial NYAG 5/20/04 Permitted certain customers and executives • N.Y. Gen. Bus. Law §§ 349 and 3522 $35 million
Corporation to market time in mutual funds in exchange reduction
Press Release • N.Y. Exec. Law § 63(12)
for “sticky assets,” despite policy over 5 years
and Judgment
prohibiting market timing. (6%)
on Consent
Strong Capital Wisconsin AG 5/20/04 Permitted certain customers and executives Not specified in release
Management to market time in mutual funds in exchange
Press Release
for “sticky assets,” despite policy
only
prohibiting market timing.
Allianz Dresdner New Jersey 6/1/04 Permitted market timing by certain • N.J. Stat. Ann. 49:3-52 $3 million $15 million
Asset AG customers in exchange for “sticky assets” (reimbursement
Management, PA to increase management fees. for investigative
Press Release
Distributors, PEA costs and further
Only
Capital, and enforcement
Pacific Equity initiatives)
Advisors LLC
(Pimco)

2 Charges listed are those brought in the verified complaint filed by the NYAG against Strong Financial Corporation. See New York v. Strong Financial Corporation, et al., No. __ (N.Y. Sup. Ct. dated 5/03).
4 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Pilgrim Baxter & SEC 6/21/04 Permitted certain customers to market time • § 34(b) of Investment Company Act $40 million $50 million
Associates, Ltd. in mutual funds, despite policy against
Advisers Act • §§ 204A, 206(1), and 206(2) of (paid to SHs) (paid to SHs)
market timing. These investors made
Release No. Investment Advisers Act
substantial profits and Pilgrim earned
2251
advisory fees on these market timing
investments.
Pilgrim Baxter & NYAG 6/21/04 Permitted certain customers to market time • N.Y. Gen. Bus. Law Art. 23-A and $10 million
Associates, Ltd. in mutual funds in violation of policy § 3493 reduction
Press Release
against market timing. Disclosed (3.16%
and Assurance • N.Y. Exec. Law § 63(12)
confidential portfolio holdings to favored reduction
of
investors to facilitate market timing. over 5 years)
Discontinuance
Banc One SEC 6/29/04 Permitted certain customers to market time • §§ 17(d), 34(b), and Rule 17d-1 of $10 million $40 million
Investment in mutual funds, despite policy against Investment Company Act
Advisers Act (paid to SHs) (paid to SHs)
Advisors market timing, and disclosed confidential
Release No. • §§ 204A, 206(1), and 206(2) of
Corporation information regarding portfolio holdings to
2254 Investment Advisers Act
favored individuals. Failed to disclose
conflicts of interest associated with this
conduct.
Banc One NYAG 6/29/04 Permitted certain customers to market • N.Y. Gen. Bus. Law § 349 $40 million
Investment time, despite policy against timing, and reduction
Press release • N.Y. Exec. Law § 63(12)
Advisors waived redemption fees for favored over 5 years
and Assurance
Corporation investors. Facilitated timing by disclosing
of
confidential portfolio holdings and
Discontinuance
arranging for timers to borrow money to
use for market timing

3 Charges listed are those brought in the complaint filed by the NYAG against Pilgrim Baxter & Associates, Ltd. See New York v. Pilgrim Baxter & Associates, Ltd., et al., No. __ (N.Y. Sup. Ct. dated 11/20/03).
5 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Franklin Advisers, SEC 8/2/04 Permitted certain customers to market time • § 34(b) of Investment Company Act $30 million $20 million
Inc. in mutual funds, despite policy against
Advisers Act • § 206(1) and (2) of Investment Advisers (paid to SHs) (paid to SHs)
market timing.
Release No. Act
2271
CIHC, Inc., SEC 8/9/04 Represented that annuities were not • § 10(b) and Rule 10b-5 of Exchange Act $2,500,000 $2,500,000
Conseco Services, designed for market timing, but permitted (CES and (CES)
Investment • § 17(a) of Securities Act
LLC, and Conseco investors to market time the annuities and Conseco
Company Act $5 million
Equity Sales, Inc. profited from fees earned from sales to • § 34(b) of Investment Company Act Services jointly)
Release No. (sought from
market timers.
(related to Inviva 26526 $5 million CIHC in
case, below) (sought from bankruptcy
CIHC in filing)
bankruptcy
(paid to SHs)
filing)
(paid to SHs)
Inviva, Inc. and SEC 8/9/04 Permitted certain investors to market time • § 10(b) and Rule 10b-5 of Exchange Act $3,500,000 $1,500,000
Jefferson National annuities and profited from fees earned (jointly) (Jefferson)
Exchange Act • § 34(b) of Investment Company Act
Life Insurance from sales to market timers.
Release No. (paid to SHs) (paid to SHs)
Company
50166
(related to CIHC
case, above)
6 Last updated: 2/10/05
PRIVILEGED AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
DRAFT

Company Regulator and Settlement Conduct Alleged Charges Brought Disgorgement Penalty Fees
Case Number Date
Janus Capital SEC 8/18/04 Permitted certain customers to market time • §§ 17(d), 34(b) and Rule 17d-1 of $50 million $50 million
Management LLC in mutual funds, despite policy against Investment Company Act
Advisers Act (paid to SHs) (paid to SHs)
market timing, in exchange for sticky
Release No. • § 206(1) and (2) of Investment Advisers
assets in order to increase management
2277 Act
fees, and waived applicable redemption
fees for such customers. Failed to disclose
these arrangements to the board of trustees
and the shareholders.
National Securities NASD 8/19/04 Helped hedge fund clients engage in Not specified in release $300,000 $300,000
Corporation deceptive and improper market timing in
Press Release (paid to fund)
mutual funds.
Only
INVESCO Funds NYAG 9/7/04 Entered into special agreements with • N.Y. Gen. Bus. Law §§ 349, 352- $75 million
Group Inc. and certain customers to permit market timing c(1)(a), 352-c(1)(c), 352-c(2)4 reduction
Press Release
AIM Advisors, in mutual funds in exchange for sticky over 5 years
Only • N.Y. Exec. Law § 63(12)
Inc. assets to increase management fees, despite (combined)
policy against market timing.
INVESCO Funds Colorado AG 9/7/04 Entered into special agreements with Not specified in release $1.5 million
Group Inc. and certain customers to permit market timing
Press Release (to AG for attys
AIM Advisors, in mutual funds in exchange for sticky
Only fees & costs and
Inc. assets to increase management fees, despite
investor ed.)
policy against market timing.

4 Charges listed are those brought in a suit filed by the NYAG against Invesco. See New York v. Invesco Funds Group, Inc., et al., No. __ (N.Y. Sup. Ct. filed 12/2/03).
7 Last updated: 2/10/05