SEC Staff Issues Denial Of No-Action Request Regarding Broker-Dealer Registration To Company Acting As A Financial Consultant And Finder Of Investors For Small Businesses

Developments of Note

FRB Grants Risk-Based Exception for Margin Loans

Federal District Court Dismisses Excessive Fee Suit against Mutual Fund Adviser and Distributor

SEC Chairman Issues Letter Concluding that a Mortgagor's Modification of Securitized Loans when Default is "Reasonably Foreseeable," but Before Default Occurs, Does Not Violate FAS 140

SEC Adopts Proxy Rule Changes Mandating Internet Availability of Proxy Materials

SEC Staff Issues Denial of No-Action Request Regarding Broker-Dealer Registration to Company Acting as a Financial Consultant and Finder of Investors for Small Businesses

Other Items of Note

SEC Staff Publishes Information Designed to Assist Newly-Registered Investment Advisers in Understanding Advisers Act Compliance Obligations

SEC Votes to Issue Concept Release Soliciting Public Comment on Use of International Financial Reporting Standards by U.S. Issuers

Developments of Note

FRB Grants Risk-Based Exception for Margin Loans

The FRB granted an exception permitting a bank holding company ("BHC") to reduce the risk-based capital impact of the Regulation T margin loans of its broker dealer subsidiary. Under the current standard capital rules, such loans generally would require a 100 percent risk weight. However, the BHC cited its low loss rates on such loans, their high level of collateralization, and the competitive disadvantage that it has faced given that broker dealers that are not part of BHCs, as well as foreign banks, do not face similar capital charges. Based on these factors, as well as the fact that recent changes in federal bankruptcy law provide a strong basis to assert that margin loan transactions are not subject to stay proceedings in the event of the borrower's bankruptcy, the FRB permitted the BHC to apply a 10 percent risk-weight to these transactions, provided that: (1) the securities collateral is liquid and readily marketable; (2) the margin loans and collateral are marked-to-market daily; (3) the margin loans are subject to initial and daily margin-maintenance requirements; and (4) the BHC has a reasonable basis to conclude that it could liquidate the collateral without undue delay in the event of borrower bankruptcy. The FRB also noted that granting this relief is consistent with the purposes of the Gramm-Leach-Bliley Act, the legislative history of which suggests Congress intended the FRB, to the extent consistent with safety and soundness, to make the risk-based capital requirements for BHCs that own broker-dealers consistent with the capital standards applied by the SEC to broker-dealers.

Federal District Court Dismisses Excessive Fee Suit against Mutual Fund Adviser and Distributor

The US District Court of Minnesota (the "Court") ruled in favor of a mutual fund adviser (the "Adviser") and its affiliated mutual fund distributor (the "Distributor") on a motion to dismiss a suit brought by shareholders of registered open-end funds managed by the Adviser (the "Funds") under Section 36(b) of the Investment Company Act of 1940, as amended (the "1940 Act"). The derivative suit alleged that the Adviser and Distributor had breached their fiduciary duty to the Funds under

Section 36(b) by charging excessive advisory fees and excessive distribution fees (the distribution fees being fees paid by the Funds under plans pursuant to Rule 12b-1 under the 1940 Act ("12b-1 fees")) and by using distribution fees as a means of securing additional compensation for advisory services.

According to the Court, the plaintiffs primarily argued that the Adviser's fees were excessive relative to the Funds' performance and relative to the lower fees paid by the non-mutual fund institutional accounts. The plaintiffs also contended that numerous elements of the process culminating in the Funds' approval of the fees in question were flawed. The Court's decision was on a summary judgment motion for dismissal by the Adviser and Distributor.

The Contract Review Process. In reviewing the facts of the case, the Court noted that before approving the advisory fees, the Funds' board of directors (the "Board") met numerous times to review both the investment performance of the Funds and the profitability of the contracts to the Adviser. The Court also noted that the Board sought the advice of independent...