SEC Rules & Regulations

Transcription

1 August 2006 Contents A Summary of Current Investment Management Regulatory Developments SEC Rules & Regulations SEC Enforcement Actions NASD Developments Industry Update SEC Rules & Regulations Chairman Cox Testifies on the State of Hedge Fund Regulation Following the Recent Goldstein Decision On July 25, 2006, the U.S. Senate Committee on Banking, Housing, and Urban Affairs ( Committee ) held a hearing on the regulation of hedge funds in the wake of the D.C. Circuit s decision in Goldstein v. SEC, No , 2006 U.S. App. LEXIS (D.C. Cir. June 23, 2006), to vacate the SEC s controversial rule requiring registration of many hedge fund advisers ( Hedge Fund Rule ). See Registration Under the Advisers Act of Certain Hedge Fund Advisers, 69 Fed. Reg. 72,054 (Dec. 10, 2004). Chairman Richard Shelby (R- AL) and ranking member Paul Sarbanes (D-MD) presided over the hearing, which was attended by only a handful of senators. SEC Chairman Christopher Cox, Under Secretary of the Treasury for Domestic Finance Randal Quarles, and Chairman of the Commodity Futures Trading Commission Reuben Jeffery III testified. The focus of the hearing, however, was on Chairman Cox and his view of the post-goldstein landscape. When asked by Senator Hagel if, post-goldstein, the SEC possesses the authority it needs to safeguard investors and the national securities markets from the risks posed by hedge funds, Chairman Cox responded that, while hedge funds remain SEC to take subject to SEC regulation and enforcement several emergency under the antifraud, civil liability and other initiatives in the provisions of the federal securities laws, in wake of Goldstein general [t]he regulatory regime vis-à-vis hedge funds is inadequate. Goldstein, Chairman Cox said, had left a gaping regulatory hole. Chairman Cox noted, for example, that the SEC lacks basic census data about hedge funds. He stated unequivocally that, in light of the near calamity caused by the 1998 collapse of Long Term Capital Management and the estimated $1.2 trillion dollars managed by hedge funds today, [h]edge funds are not, should not be, and will not be unregulated. Chairman Cox did not focus exclusively on the risks posed by hedge funds, but also discussed the salutary effects they have on the national securities markets. He noted that hedge funds contribute to capital formation, market efficiency,

2 price discovery and liquidity, that their role in the derivatives market helps counterparties reduce or manage risk, and that they provide a way for institutional investors to reduce their exposure to downside risk. Because hedge funds provide benefits along with posing risks, he counseled the Committee against overregulation. As a general principle... I would counsel that to the maximum extent possible our actions should be non-intrusive. The government, Chairman Cox said, should not interfere with hedge funds investment strategies or operations, including the use of derivatives trading, leverage and short selling. Legislation should not trammel upon hedge funds creativity, liquidity or flexibility, there should be no portfolio disclosure, and hedge funds should be permitted to charge their clients performance fees. When asked by Senator Shelby why any legislation should not require more portfolio disclosure, Chairman Cox responded that the benefits of nondisclosure simply outweigh the risks. He stated that a hedge fund s ability to keep its trading strategies and portfolio composition a secret is the key to its success. He also stated that he believed there is broad consensus among the five Commissioners on this point. Chairman Cox discussed the SEC s efforts to address the regulatory issues created by Goldstein. To that end, he informed the Committee that he had directed the SEC staff to undertake a comprehensive review of the D.C. Circuit s decision, and he outlined three emergency measures that he intended to propose to the full Commission. First, he proposed a new antifraud rule under Section 206(4) of the Investment Advisers Act of 1940 ( Advisers Act ). He noted that, while the D.C. Circuit had held that the antifraud provisions of Sections 206(1) and (2) apply only to clients and not investors, the court itself pointed out that Section 206(4) is not limited to fraud against clients. The result, Chairman Cox said, would be a rule that could withstand judicial scrutiny, and which would clearly state that hedge fund advisers owe serious obligations to investors in the hedge funds. He said the SEC staff is currently evaluating the SEC s authority to promulgate this rule. Second, in order to insure that hedge fund advisers who were relying on the now-invalidated rule are not suddenly in violation of our regulatory require- 2

3 ments when the court issues its final mandate in mid-august, he proposed an emergency action so that all transitional and exemptive rules contained in the vacated Hedge Fund Rule are restored to their full legal effect. This proposal indicates that the SEC views Goldstein as vacating not just the client counting rule for private funds, but also all of the other rules and amendments promulgated in the same rulemaking as the Hedge Fund Rule. For example, he proposed an emergency action to restore, to advisers who registered under the vacated Hedge Fund Rule, the qualified exemption from the recordkeeping requirement for performance data relating to periods prior to their registration. According to Chairman Cox, if the SEC did not restore the exemption, advisers who remain registered but did not create records for the periods prior to the registration would lose the ability to use their performance track record. This, he said, would have the perverse[] effect of discouraging hedge fund advisers from voluntarily remaining registered. Similarly, Chairman Cox proposed to restore the grandfathering provision that permitted newly registered advisers to maintain their fee arrangements with existing clients, even if those arrangements were not otherwise compliant with Rule s prohibition on charging performance fees to non- qualified clients. Moreover, he proposed an emergency action to restore the extension of time for advisers of funds of hedge funds to provide their audited financial statements under Rule 206(4)-2 under the Advisers Act. In this same vein, he proposed a rule to clarify the status of offshore advisers of offshore funds. Under the vacated Hedge Fund Rule, offshore advisers to offshore funds were required to register assuming their funds had more than 14 U.S. investors but they were subject to more limited regulation under the Advisers Act. Cox believed that Goldstein had creat[ed] doubt whether registered offshore advisers will be subject to all of the provisions of the [Advisers] Act with respect to their offshore hedge funds. Goldstein therefore created a disincentive for offshore advisers to remain voluntarily registered, which, Chairman Cox told the Committee, he had directed the SEC staff to address. Third, he proposed amending the definition of accredited investor as it applies to retail investment in unregistered hedge fund offerings under 3

4 Regulation D under the Securities Act of Hedge funds, he said, are not for mom and pop investors and the current definition of accredited investor, Commissioner Cox stated, is not only out of date, but wholly inadequate to protect unsophisticated investors from the complex risks of investment in most hedge funds. By way of example, he pointed out that one definition of an accredited investor is [a]ny natural person whose individual net worth, or joint net worth with that person s spouse, at the time of his purchase exceeds $1,000,000, and that a person s net worth includes his house. The Commissioner found it alarming that, under this definition of accredited investor, a California couple where the median home price is well over $500,000 would qualify to invest in an unregistered hedge fund with just over $200,000 each in other assets. Chairman Cox noted that the Hedge Fund Rule had effectively raised this net worth threshold in many cases because, pursuant to Rule under the Advisers Act, registered advisers can only charge performance fees (unless another exemption applies) to clients with a joint net worth of more than $1,500,000. Chairman Cox said that he would like to see this higher threshold restored. A copy of Chairman Cox s testimony is available at: testimony/2006/ts072506cc.htm. SEC Staff Indicates that Cash Solicitation Rule Does Not Apply to Hedge Fund Advisers SEC is reportedly close to issuing written guidance on the application of the Cash Solicitation Rule to hedge fund advisers Robert Plaze, Associate Director of the SEC s Division of Investment Management, has reportedly indicated that the SEC does not view Rule 206(4)- 3 under the Investment Advisers Act of 1940 (the Cash Solicitation Rule ) as applying to the solicitation of investors for hedge funds managed by registered investment advisers. Reports of Mr. Plaze s comments follow earlier reports that, in a recent outreach meeting with chief compliance officers, the staff of the SEC s Northeast Regional Office announced that investment advisers would no longer be cited for failing to comply with the Cash Solicitation Rule with respect to such solicitations. While this position has not yet been confirmed in writing, Davis Polk understands that the SEC will soon issue written guidance on the application of the Cash Solicitation Rule to registered hedge fund advisers. 4

5 Senior SEC Staff Member Testifies on SEC Concerns with Side Letters SEC takes a dim view of side letters that benefit one investor at the expense of others In her recent testimony before the Senate Committee on Banking, Housing and Urban Affairs, Susan Ferris Wyderko, Director of the SEC s Office of Investor Education and Assistance, discussed the SEC s views on side letters used by hedge fund advisers. According to Ms. Wyderko, the SEC is most concerned with side letters that involve material conflicts of interest that can harm the interests of other investors. As the primary examples of this type of side letter, Ms. Wyderko cited those that give certain investors liquidity preferences or provide them with more access to portfolio information. Other side letters, however, address matters that raise few concerns, such as the ability to make additional investments, receive treatment as favorable as other investors, or limit management fees and incentives. A copy of Ms. Wyderko s testimony is available at: SEC Issues Interpretive Guidance on Soft-Dollar Use Under Section 28(e) of the Exchange Act On July 18, 2006, the SEC issued interpretive guidance (the Release ) that defines the scope of the safe harbor under Section 28(e) of the Securities Exchange Act of 1934 (the Exchange Act ), which permits money managers to use client commissions, or soft dollars, to purchase brokerage and research services. The SEC s guidance is effective as of July 24, 2006, but market participants may continue to rely on its prior interpretations of Section 28(e) until January 24, Fiduciary principles generally require money managers to seek the best execution for client trades. However, Section 28(e), originally enacted in 1975, allows money managers to use client commissions to purchase brokerage and research services under certain circumstances without breaching the fiduciary duties they owe to their clients. More specifically, Section 28(e) includes a safe harbor that allows a money manager to cause an account to pay more than the lowest available commission if such manager determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services received. 5

6 Consistent with the SEC s proposed guidance which was published for comment in October 2005 (the Proposed Guidance ) and is described in greater detail in the November 2005, the Release articulates a framework for analyzing the availability of the safe harbor for any particular product or service. Specifically, in assessing whether a product or service falls within the safe harbor, an investment manager must: (a) determine whether the product or service is research or brokerage within the meaning of Section 28(e)(3); (b) determine whether the eligible product or service actually provides lawful and appropriate assistance to the manager in the performance of his decision-making responsibilities; and (c) make a good faith determination as to whether the amount of client commissions is reasonable in light of the value of the products or services provided by the broker-dealer. SEC narrows the Section 28(e) safe harbor for use of soft dollars by money managers With respect to the first step, to qualify as research services under Section 28(e), products or services must constitute advice, analyses or reports. Adopting the analysis of this statutory requirement set forth in the Proposed Guidance, the Release provides that, in order to be considered research, the product or service must demonstrate an expression of reasoning or knowledge relating to the subject matter set forth in Section 28(e)(3)(A) or (B) (i.e., the securities or financial markets). In contrast, items with inherently tangible or physical attributes are generally excluded from the research category. In its discussion of the application of this interpretation, the Release provides examples of eligible research items, including traditional research reports on particular issuers or securities, discussions with research analysts and certain financial newsletters and trade journals, to name a few. Among the examples of ineligible research items are mass-marketed publications, travel, entertainment and meals associated with attending seminars or conferences, and various overhead items. In addition, computer hardware, including terminals and accessories, and the delivery of research (e.g., telephone lines and computer cables) are ineligible as research under the safe harbor. The SEC also addresses the scope of brokerage services under Section 28(e). Under Section 28(e), a person provides brokerage services when he or she effects securities transactions and performs functions thereto (such as clearance, settlement, and custody) or required in connection therewith.... 6

7 Interpreting this statutory language in the Release, the SEC adopts a temporal standard, which was introduced in the Proposed Guidance, to distinguish between those products and services that are eligible as brokerage and those that are not. Specifically, eligible brokerage services occur during the period that begins when the money manager communicates with the broker-dealer for the purposes of transmitting an order for execution and ends when funds or securities are delivered or credited to the advised account of the account holder s agent. The following are examples of items that are eligible as brokerage according to the Release: trading software; communications services related to the execution, clearing and settlement of securities transactions; and incidental brokerage services associated with clearance, settlement and short-term custody services. The SEC cites overhead, such as telephones, computer terminals and software functionality used for recordkeeping or administrative purposes and expenses related to compliance responsibilities, as ineligible. In contrast, research includes services provided before the communication of an order. As in the Proposed Guidance, the Release retains the concept of mixed-use items i.e., items that are partly eligible and partly ineligible for the safe harbor a concept that the SEC introduced in its 1986 soft-dollar guidance. As in the Proposed Guidance, the SEC s Release indicates that the safe harbor protects only the use of client commissions for the eligible portion of the mixeduse items. The Release thus reemphasizes the need for managers to document adequately allocations between eligible and ineligible aspects of such mixeduse items. As noted above, in addition to determining that an item properly qualifies as research or brokerage, an adviser must also determine that (a) it provides lawful and appropriate assistance to him in the performance of his investment decision-making responsibilities and (b) the amount of client commissions used to purchase the item is reasonable. As before, conduct not protected by Section 28(e) may constitute a breach of fiduciary duty, as well as a violation of the securities laws, particularly the Investment Advisers Act of 1940 and the Investment Company Act of

8 The Release also provides detailed guidance on the status of third-party research, commission-sharing arrangements and other related topics that are beyond the scope of this summary. For a more detailed discussion of the Release, please ask your Davis Polk contact for a copy of the Davis Polk Interested Persons Memorandum, dated August 1, 2006, regarding the Release. A copy of the Release is available at: Executive compensation requirements will apply to BDCs and the threshold for disclosure of independent director transactions will be increased for all investment companies SEC s Changes to Executive Compensation Disclosure Requirements Affect Investment Companies On July 26, 2006, the SEC issued a press release (the Release ) announcing its long-anticipated decision to adopt changes to the rules governing disclosure of executive compensation in proxy statements, registration statements and other filings (the New Rules ). While the text of the New Rules has not yet been published in the Federal Register, it is our understanding that the New Rules were adopted substantially as proposed. Davis Polk will be monitoring commentary and analyzing the text of the adopting release, once published. The New Rules impact business development companies ( BDCs ) and other investment companies in several ways. First, according to the Release, the new executive compensation disclosure requirements will apply in their entirety to BDCs. Second, the New Rules change for all investment companies the disclosure requirements relating to certain interests, transactions and relationships of independent directors by, among other things, increasing the threshold for disclosure from $60,000 to $120,000. Third, the proxy rules applicable to all investment companies will be reorganized to reflect organizational changes proposed for operating companies. Investment companies will generally be required to comply with the New Rules as of December 15, The SEC s press release regarding the New Rules is available at: 8

9 SEC Enforcement Actions SEC Settles Charges that a Financial Newsletter is an Investment Adviser in Violation of the Advisers Act Weiss Research is ordered to pay a penalty of $350,000 and to disgorge over $1.6 million for Advisers Act violations On June 22, 2006, the SEC issued an order in settlement of charges that Weiss Research, Inc., a publisher of newsletters about securities, its owner Martin Weiss and its editor Lawrence Edelson (collectively, the Respondents ) violated various provisions of the Investment Advisers Act of 1940 (the Advisers Act ). Weiss Research, which has not been registered as an investment adviser pursuant to Section 203(a) of the Advisers Act since 1997, publishes newsletters that provide general commentary about the securities markets as well as premium services newsletters that recommend specific securities transactions. In its order, the SEC found that, between September 2001 and April 2005, Weiss Research enabled its premium services subscribers to engage in autotrading, whereby subscribers authorized their broker-dealers to execute automatically all transactions recommended in the Weiss Research newsletters. In addition, Weiss Research allegedly misled its subscribers in a number of ways by disseminating advertisements that selectively highlighted profitable trades and presented an unrealistic picture of Weiss Research s success rate and by representing that subscribers would receive expert trading advice from Edelson despite his actual lack of involvement. The SEC found that Weiss Research met the definition of investment adviser under Section 202(a)(11) by engaging in the business of advising others as to the buying and selling of securities in response to market activity for an annual fee. Although Section 202(a)(11)(D) carves out an exception to the definition of investment adviser for the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation, the exclusion applies only so long as communications between the newsletter and its subscribers remain entirely impersonal and do not develop into the kind of fiduciary, person-to-person relationships that... are characteristic of investment advisers-client relationships. Lowe v. SEC, 472 U.S. 181, 210 9

10 (1985). According to the SEC, Weiss Research s auto-trading program rendered it ineligible for the Section 202(a)(11)(D) exception. As such, the SEC found, Weiss Research violated Section 203(a) of the Advisers Act by failing to register as an investment adviser and Martin Weiss aided and abetted its violation. In making claims about profitability and past performance in advertisements that were inconsistent with overall past performance and mischaracterizing Edelson s role, Weiss Research was also found to have violated, and Martin Weiss and Edelson to have willfully aided and abetted violations of, Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, which specifically prohibits an adviser from using false or misleading advertisements. In addition, the SEC found that Weiss had willfully violated, and Martin Weiss and Edelson willfully aided and abetted violations of, Rule 206(4)-1(a)(2) under the Advisers Act, which makes it unlawful for an adviser s advertising to refer to specific past recommendations without providing a complete list of all recommendations made within one year. Without admitting or denying the SEC s findings, the Respondents agreed to settle the charges against them. The SEC ordered each of the Respondents to cease and desist from further violations of Advisers Act Sections 206(2) and 206(4) and Rules 206(4)-1(a)(2) and (5) thereunder; the SEC also ordered each of Weiss Research and Martin Weiss to cease and desist from further violations of Section 203(a) as well. In addition to various remedial undertakings, Weiss Research was ordered to pay over $1.6 million in disgorgement and prejudgment interest and a civil penalty of $350,000. Martin Weiss and Edelson were ordered to pay a civil penalty of $100,000 and $75,000, respectively. A copy of the SEC s order is available at: admin/2006/ia-2525.pdf. 10

11 Jury Finds CEO of Adviser to PIMCO Mutual Funds Liable for Improper Market Timing Stephen Treadway is found liable for improper market timing in PIMCO mutual funds On June 30, 2006, the SEC announced that, in a civil suit brought by the SEC, a federal jury found Stephen J. Treadway, the former chairman of the board of the trustees of the PIMCO equity mutual funds, liable for defrauding investors through an undisclosed market-timing arrangement with Canary Capital Partners LLC ( Canary ). Treadway was also the chief executive officer of PIMCO Advisors Fund Management LLC ( PAFM ), which along with PEA Capital LLC ( PEA ) is the adviser to the PIMCO funds, and PIMCO Advisors Distributors LLC ( PAD and together with PAFM and PEA, the PIMCO Entities ), the funds distributor. The SEC filed charges on May 6, 2004, (and an amended complaint on November 10, 2004) in the U.S. District Court for the Southern District of New York. Previously, on June 16, 2006, Kenneth W. Corba, the former chief executive officer of PEA agreed to settle substantially similar civil fraud charges brought against him by the SEC. Corba agreed to pay a $200,000 civil penalty and consented to an order barring him from association with any investment adviser (with the right to reapply after one year), without admitting or denying the allegations. In its complaint, the SEC alleged that, from February 2002 until April 2003, the PIMCO Entities enabled Canary to execute more than $4 billion in market-timing trades in PIMCO mutual funds through approximately 108 round-trip trades. The PIMCO Entities allegedly did so in exchange for long-term investments (i.e., so-called sticky assets ) by Canary in a mutual fund and a hedge fund from which PAFM and PEA earned management fees. According to the SEC, Corba negotiated the market-timing arrangement with Canary, while Treadway approved it. Corba and Treadway allegedly discussed the Canary arrangement approximately once per month but, despite increasing reservations, allowed it to continue. In addition, according to the SEC s complaint, the PIMCO funds prospectuses, as both Treadway and Corba knew, failed to disclose the Canary market-timing arrangement and were therefore false and misleading. 11

12 After an eight-day trial before the Honorable Victor Marrero, the jury found Treadway liable for violating (and/or for aiding and abetting violations of) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 206(2) of the Investment Advisers Act of 1940 and Sections 34(b) and 36(a) of the Investment Company Act of As discussed in the October 2004, the PIMCO Entities agreed in September 2004 to pay $50 million to settle the related SEC charges against them. A copy of the SEC s release announcing the jury verdicts is available at: A copy of the SEC s original complaint against Treadway, Corba and the PIMCO Entities is available at: SEC Settles Charges that Major Wall Street Firm Failed to Maintain and Enforce Inside Information Policies Major Wall Street firm agrees to pay $10 million in settlement of charges over deficient insider trading policies On June 27, 2006, the SEC issued an order in settlement of charges that Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. (collectively, the Respondents ), both of which are registered broker-dealers and investment advisers, failed to maintain adequate policies and procedures to prevent employees from misusing material nonpublic information ( inside information ). The charges alleged that the Respondents violated Section 204A of the Investment Advisers Act of 1940 (the Advisers Act ) and Section 15(f) of the Securities Exchange Act of 1934 (the Exchange Act ), which require registered investment advisers and registered brokers and dealers, respectively, to maintain and enforce written policies and procedures reasonably designed to prevent misuse of inside information in violation of the federal securities laws. In its order, the SEC found that, from as early as 1997 until 2006, the Respondents policies and procedures suffered from a number of systemic deficiencies. For example, from 1997 until 2005, the Respondents allegedly failed 12

13 to conduct surveillance of trading of the securities of approximately 3,000 issuers that appeared on the firm s Watch List. (Among their other policies and procedures designed to prevent misuse of inside information, the Respondents maintained a so-called Watch List of companies about which they possessed material nonpublic information.) The SEC also found that, from 2000 until 2004, the Respondents failed to conduct surveillance of hundreds of thousands of employee and employee-related accounts (whether or not within the Respondents) to determine whether securities had been traded based on inside information. Moreover, from 1997 to 2006, the Respondents written policies relating to Watch List surveillance allegedly failed to give adequate instructions to personnel on how to conduct such surveillance. As a result of such deficiencies, the SEC found, the Respondents may have failed to detect illegal insider trading by them, their employees or persons related to their employees. Without admitting or denying the SEC s findings, the Respondents agreed to be censured, to pay a civil penalty of $10 million and to cease and desist from future violations of Section 204A of the Advisers Act and Section 15(f) of the Exchange Act. The Respondents are also required to retain an independent consultant to review and report on their procedures for (i) preventing future misuse of inside information and (ii) for examining retrospectively the trading that was not previously monitored. A copy of the SEC s order is available at: admin/2006/ pdf. A copy of the SEC s press release announcing the settlement is available at: 13

14 NASD Developments SEC Approves Amendments to Mutual Fund Advertising Rules Proposed by the NASD Amendments to NASD Rules 2210 and 2211 will require disclosure of expense ratios in performance advertising In a release dated July 5, 2006 (the Release ), the SEC announced its approval of a NASD proposal to amend two NASD rules Rule 2210 and Rule 2211 relating to advertising by mutual funds. As approved, the amendments (the Approved Amendments ) will require mutual fund advertisements that contain performance information also to include certain expense and standardized performance information. These new requirements are intended to improve investor awareness of the costs associated with buying and owning a mutual fund and to facilitate the comparison of funds. Specifically, the Approved Amendments will require NASD members to include the following information in advertisements and other communications with the public that present performance information for non-money market funds: (a) the fund s standardized performance information, calculated in accordance with Rule 482 under the Securities Act of 1933 and Rule 34b-1 under Investment Company Act of 1940 and set forth in a type size at least as large as that used for any non-standardized performance information; (b) the fund s maximum sales charge imposed at the time of purchase or the maximum deferred sales charge; and (c) the fund s total annual operating expense ratio as stated in the fund s most recent prospectus (i.e., gross of any fee waivers and expense reimbursements). All such information must be set forth clearly and prominently. In response to letters from five commenters, the Approved Amendments differ in three notable ways from the amendments that were originally proposed by the NASD in March 2004 (the Initial Proposal ). First, whereas the Initial Proposal would have mandated that all required performance information and fee disclosures in advertisements (other than radio, television and video advertisements) be set forth in a prominent text box containing only the required information, the Approved Amendments will restrict the text box requirement to print advertisements (i.e., not websites or other electronic advertisements) 14

15 and will permit other pertinent comparative data and disclosures required by Rules 482 and 34b-1 to be included in the text box. In addition, funds will be able to use hyperlinks to show such standardized performance information and other disclosures, subject to certain conditions. Second, whereas the Initial Proposal would have required performance sales material to show a fund s annual operating expenses gross of fee waivers and reimbursements, the Approved Amendments clarify that, in addition to the unsubsidized expense ratio, the materials may also include the expense ratio net of fee waivers and reimbursements as long as the subsidized ratio is presented in a fair and balanced manner in accordance with Rule Third, the Initial Proposal stated that the NASD would publish a Notice to Members announcing SEC approval within 60 days of such approval and that 30 days thereafter the new requirements would become effective. However, the Approved Amendments provide that the rule change will take effect six months following the end of the calendar quarter after publication of the Notice to Members. In addition, NASD members will be permitted to file with the NASD on a case-by-case basis templates to show how performance sales material will be revised to satisfy the new rule requirements. Comments on the Approved Amendments may be submitted on or before August 2, A copy of the Release is available at: A copy of the Approved Amendments is available at: pdf. 15

16 Industry Update U.S. Pension Bill Passes the Senate Without Amendment Contacts If you have questions about the foregoing, please contact the following: Marlene Alva Nora Jordan Yukako Kawata Leor Landa The U.S. Senate passed a version of the pension bill on August 4, 2006 before the start of its summer recess. The bill, which was passed by the House of Representatives on July 28, had been negotiated among members of the House and Senate conference committee charged with reconciling the pension bills passed by each chamber earlier this year. The bill passed by Congress includes a plan asset provision, which leaves the test at 25% for benefit plan investors in a private investment fund (determined on a class-by-class basis), but excludes governmental and non-u.s. plans from the definition of benefit plan investors. Bill would exclude governmental and non-u.s. pension plans from the plan asset test There had been haggling to get the bill bundled with estate tax and minimum wage reforms, but the House and Senate approved the pension bill separately so that they could begin their summer recess. For the bill to become law, President Bush must sign it. If he does so, the plan asset change will be effective immediately. Danforth Townley danforth.townley@dpw.com Caroline Adams caroline.adams@dpw.com Gregory Rowland gregory.rowland@dpw.com This memorandum is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. 16