INVESTMENT ADVISERS ACT OF 1940
Release No. 2251 / June 21, 2004

INVESTMENT COMPANY ACT OF 1940
Release No. 26470 / June 21, 2004

ADMINISTRATIVE PROCEEDING
File No. 3-11524


In the Matter of

PILGRIM BAXTER &
ASSOCIATES, LTD.,

Respondent.


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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND AN ORDER TO CEASE-AND-DESIST PURSUANT TO SECTIONS 203(e), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Pilgrim Baxter & Associates, Ltd. ("PBA" or "Respondent").

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondent consents to the entry of the Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and An Order to Cease-and-Desist Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Order"), as set forth below.

III.

On the basis of the Order and Respondent's Offer, the Commission finds 1 that:

Overview

1. From at least June 1998 through December 2001, PBA permitted a select group of investors to trade rapidly in and out of certain PBHG funds, reaping profits and diluting the value of the funds to the detriment of long-term investors that the funds purported to cultivate. These rapid timers made significant profits over those years. Similarly, PBA earned advisory fees on these timers' funds. Moreover, Harold J. Baxter ("Baxter") and Gary L. Pilgrim ("Pilgrim") reaped multimillion-dollar profits from the sale of PBA's predecessor entity. 2 Meanwhile, numerous small investors in the PBHG Funds experienced a decline in the value of their investments.

2. PBA recognized that "timing" was detrimental to the funds. PBHG Funds' prospectuses in effect during this time limited exchanges into the PBHG Cash Reserves Fund from any other PBHG fund to four times a year. Despite this, PBA permitted timers, whose investments exceeded $600 million at their height, to continue to profit from trading in and out of the funds at a rate far in excess of four round trips per year.

3. The detrimental timing permitted by PBA was exacerbated by the self-dealing by its principals. Pilgrim was a substantial investor in a hedge fund. Beginning in 2000, PBA permitted this hedge fund to engage in rapid trading of the PBHG Growth Fund, which Pilgrim himself managed. Another source of high volume timers was a New York brokerage firm headed by a personal friend of Baxter. In addition to permitting customers of this brokerage firm to actively trade the PBHG Funds, Baxter provided to his personal friend nonpublic information consisting of 30-day stale portfolio holdings of PBHG funds. Baxter's friend, in turn, provided the nonpublic information to brokerage customers to use to facilitate market timing of the PBHG Funds and to exercise hedging strategies through other financial and brokerage institutions.

4. The family of hedge funds including the hedge fund in which Pilgrim invested, and the brokerage firm headed by Baxter's friend (the "New York Broker"), combined, accounted for more than half of the market timing money in the PBHG Funds. In mid-2001, when PBA decided to limit market-timing activity, it terminated the trading privileges of all identified timers except for this hedge fund family and the New York Broker in which Pilgrim and Baxter had respective interests.

5. At all times material to the allegations in the Order, PBA acted through its principals, Pilgrim and Baxter. As an investment adviser, PBA had a fiduciary duty to act at all times in the best interest of its clients. Accordingly, PBA had an affirmative obligation to act in the utmost good faith, and to provide full and fair disclosure of all material facts to its clients. It further had an affirmative obligation to exercise reasonable care to avoid misleading its clients.

Respondent

6. Pilgrim Baxter & Associates, Ltd. is an investment adviser registered with the Commission, and is the investment adviser to the PBHG Funds, a Delaware statutory trust and a family of 18 mutual funds. PBHG Funds is an investment company registered with the Commission since December 1985 pursuant to Section 8 of the Investment Company Act, 15 U.S.C. § 80a-8. As of December 31, 2003, PBA managed approximately $8.7 billion. PBA is an indirect wholly owned subsidiary of Old Mutual, plc, which is an international financial services company based in London, England. On November 20, 2003, the Commission filed an action against PBA, Pilgrim and Baxter in federal district court in connection with the matters described herein. SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA).

Other Relevant Persons

7. Pilgrim, age 63, was, at all relevant times, the President, Chief Investment Officer, and Director of PBA, and the portfolio manager of the PBHG Growth Fund. He was also President of the PBHG Funds. Pilgrim resigned from these positions on November 13, 2003. Pilgrim resides in Malvern, Pennsylvania. On November 20, 2003, the Commission filed an action against PBA, Pilgrim and Baxter in federal district court in connection with the matters described herein. SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA).

8. Baxter, age 58, served as chief executive officer and chairman of PBA from its inception in 1982, until he resigned on November 13, 2003. Baxter was also chairman and trustee of the PBHG Funds and the PBHG Insurance Series Fund, positions from which he resigned on November 13, 2003. Baxter resides in Berwyn, Pennsylvania. On November 20, 2003, the Commission filed an action against PBA, Pilgrim and Baxter in federal district court in connection with the matters described herein. SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA).

Facts

Short-Term Trading and/or Market Timing

9. Market timing includes (a) frequent buying and selling of shares of the same mutual fund or (b) buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares if the market timer is exploiting pricing inefficiencies, or disrupt the management of the mutual fund's investment portfolio and can cause the targeted mutual fund to incur costs borne by other shareholders to accommodate frequent buying and selling of shares by the market timer.

PBHG Funds Prospectus Disclosures Regarding Short-Term Trading

10. Beginning in at least 1996, all PBHG fund prospectuses, signed by Baxter and Pilgrim on behalf of the PBHG Funds, disclosed that investors would be permitted to make no more than four exchanges per year into the PBHG Cash Reserves Fund from any other PBHG fund. The prospectuses did not disclose any exception to this policy for any investor or investors.

11. PBA recognized the fact that the four-exchange limitation was in the best interests of long-term shareholders. At least as early as 1998, PBA internal documents reflect that PBA recognized the negative impact associated with excessive short-term trading, or market timing, on a portfolio manager's ability to effectively manage the assets of their funds.

12. Nevertheless, from 1998 through mid-2001, more than two dozen PBHG Funds accountholders conducted short-term trading of the PBHG Funds through the PBHG Cash Reserve Fund that was far in excess of the disclosed limitation of four exchanges per year. PBA monitored timing activity in the PBHG Funds and, in July 2001, took some steps to limit such trading. At its peak, approximately 28 PBHG Funds accountholders exceeded the four-exchange policy, and their accounts contained total assets of approximately $600 million. The PBHG Funds became known as "timer friendly." None of this timing activity, however, was disclosed to shareholders and the prospectus disclosure of the four-exchange limit remained unchanged.

13. In July 2001, in recognition of the deleterious effects that market timers were having on the PBHG Funds, PBA determined to take action against market timers, and suspended the trading of all market timers except those related to two identified entities, namely the hedge fund family in which Pilgrim invested, and the New York Broker. In August of 2001, timing assets of these two timers comprised more than 60% of the PBHG Funds' known timer assets. Although PBA briefly limited the timing capacity of timers related to these two entities, over the next few months these entities increased their timing so that elimination of most of the timers from the PBHG Funds did not eliminate most of the timing activity. The New York Broker and the hedge fund family were permitted to continue timing the PBHG Funds until the end of 2001, when their privileges were also terminated.

Pilgrim's Investment in the Hedge Fund and the Hedge Fund's Short-Term Trading in PBHG Funds

14. On March 1, 1995, Pilgrim and his wife made an initial investment of $1,057,000 in a hedge fund. They were two of the three original limited partners in this hedge fund. Over time, Pilgrim and his family members substantially increased their investment in the fund.

15. The hedge fund's investing strategy consisted of actively trading shares in mutual funds based upon "a quantitative tactical asset allocation model." Its trading strategy was designed to produce profits from active trading between mutual funds holding equity securities and mutual funds holding fixed income securities. The strategy was purportedly based on a mathematical model that relied on the analysis of a combination of factors, including investment objectives and current market conditions.

16. The hedge fund originally agreed that it would not invest in any of the PBHG funds. However, in 2000 the hedge fund identified the PBHG Growth Fund as a suitable candidate for its active trading model and, in March of that year, it asked Pilgrim for permission to invest in the PBHG Growth Fund and other PBHG funds.

17. At that time, Pilgrim was the portfolio manager for the PBHG Growth Fund, PBHG's largest fund. As an investor in the hedge fund he was fully aware of the hedge fund's short-term trading strategy.

18. Pilgrim discussed the request with Baxter who was aware that Pilgrim was a significant investor in the hedge fund and was aware of the hedge fund's short-term trading strategy. Baxter nonetheless approved the hedge fund's request to be allowed to trade in the PBHG Growth Fund using its active trading model.

19. Neither Pilgrim nor Baxter informed the PBGH Funds' board that a hedge fund in which Pilgrim was a significant investor had been given permission to market-time the very fund that Pilgrim was managing. Nor did PBA, acting through its principals, modify the disclosures in the prospectuses or otherwise inform shareholders that the hedge fund had been exempted from the four-exchange limitation.

20. Beginning in March 2000, this hedge fund actively engaged in short-term trading of the PBHG Funds. Between March and December 2000, the hedge fund exceeded the PBHG Funds' limitation of only four exchanges between the Cash Reserves Fund and other PBHG funds, executing 54 exchanges between either the PBHG Growth Fund or the PBHG Select Growth Fund on the one hand, and the PBHG Cash Reserves Fund on the other. The hedge fund's trades had an average duration of 2.24 days and an average asset value of more than $25 million.

21. Between January 2001 and December 2001, the hedge fund account executed 66 exchanges between the PBHG Cash Reserves Fund and either the PBHG Growth Fund, the PBHG Technology and Communications Fund, the PBHG Select Equity Fund, or the PBHG Large Cap 20 Fund. The average trade had an average duration of 2.4 days, and had an asset value of more than $40 million.

22. Because the hedge funds' money always remained within the PBHG Funds' rather than being withdrawn in cash, PBA earned management fees continuously on that money. From March 2000 through December 2001, PBA collected management fees of approximately $690,000 from investments by the hedge fund.

23. In late 2000, while the hedge fund was timing the PBHG Funds, Pilgrim began increasing his investment in it. By the end of 2001, Pilgrim's investment had increased from $11.5 million to $28 million, which represented 45% of the hedge fund's assets.

24. During 2000 and 2001, the hedge fund realized at least $9 million in profits from its trading activity in the PBHG Funds. In contrast, the PBHG Growth Fund, in which the hedge fund primarily conducted its short-term trading, and which Pilgrim managed, reported losses of nearly 23% and 34% in 2000 and 2001, respectively.

PBA Provides Nonpublic, Material Information to Outsiders

25. The other entity whose customers were permitted to continue timing the PBHG Funds during the second half of 2001 was the New York Broker, run by a personal friend of Baxter. Customers of the New York Broker not only benefited from their ability, as customers of this broker, to time the PBHG Funds, but they also were able to capitalize on nonpublic portfolio information that Baxter provided to his friend.

26. From as early as 1998 and up to as recently as September 2003, PBA, through Baxter, repeatedly provided 30-day stale PBHG funds' portfolio holdings to Baxter's personal friend. When provided, these portfolio holdings were material, nonpublic information. Baxter's friend then provided the information to his firm's customers, who in turn used the information to their advantage not only in their trading of the PBHG Funds, but to create derivative securities baskets that allowed them to simulate short positions in the PBHG Funds and thereby create profitable hedging transactions through other financial institutions.

Violations

27. As a result of the conduct described above, PBA willfully violated Sections 206(1) and 206(2) of the Advisers Act in that it, while acting as an investment adviser, employed devices, schemes, or artifices to defraud clients or prospective clients; and engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon clients or prospective clients. Specifically, PBA knowingly, recklessly, and/or negligently failed to disclose to the PBHG Funds' board that Pilgrim and/or Baxter were engaging in potentially self-dealing short term securities trading, were permitting market timing in the PBHG Funds contrary to prospectus disclosure, and were disclosing material nonpublic information to Baxter's personal friend whose customers were market timing the PBHG Funds. Accordingly, PBA willfully violated Sections 206(1) and 206(2) of the Advisers Act.

28. As a result of the conduct described above, PBA willfully violated Section 204A of the Advisers Act in that it, while acting as an investment adviser, failed to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser's business, to prevent the misuse of material, nonpublic information by such investment adviser or any person associated with such investment adviser. PBA violated this provision by providing, through Baxter, nonpublic information regarding, among other things, current portfolio holdings, valuations and transactions. Accordingly, PBA willfully violated Section 204A of the Advisers Act.

29. As a result of the conduct described above, PBA willfully violated Section 34(b) of the Investment Company Act in that it made untrue statements of a material fact and omitted to state facts necessary in order to prevent the statements made, in the light of the circumstances under which they were made, from being materially misleading in any registration statement, application, report, account, record, or other document filed with the Commission or the keeping of which is required pursuant to Section 31(a) of the Investment Company Act. PBA violated this provision by making material misstatements and by omitting material information in the PBHG Funds' prospectuses regarding limitations on exchanges into the PBHG Cash Reserves Funds. These prospectuses are filed with the Commission. Accordingly, PBA willfully violated Section 34(b) of the Investment Company Act.

30. In determining to accept the Offer, the Commission considered cooperation afforded the Commission staff by PBA and remedial efforts undertaken by PBA (as described below).

Certain Remedial Efforts and Voluntary Undertakings

31. In determining to accept the Offer, the Commission considered the following efforts voluntarily undertaken by PBA and the PBHG Funds:

Specific Actions and Internal Reviews

a) On November 13, 2003, upon PBA's determination that the continued association of Baxter and Pilgrim with PBA and the PBHG Funds was not in the best interest of either the adviser or the PBHG Funds, Baxter and Pilgrim resigned all positions with PBA and its related entities and all positions with the PBHG Funds;

b) PBA separated the offices of Chairman and Chief Executive Officer and (a) appointed a new, formerly unaffiliated individual to serve as Chief Executive Officer and (b) appointed a new Chairman. Moreover, the Board of Trustees of the PBHG Funds was restructured so that no member of the current Board of Trustees of the PBHG Funds is a person who either (i) was a director, officer or employee of PBA at any point during the preceding 10 years or (ii) is an interested person, as defined in the Investment Company Act, of the fund or of PBA;

c) The Board of Trustees of the PBHG Funds retained special counsel to advise the Trustees and the Funds with respect to regulatory inquiries regarding market timing and late trading issues; and PBA hired an additional attorney and an additional compliance officer to assist in the monitoring of PBA's compliance with the federal securities laws, including monitoring compliance and enforcement of PBA's Code of Ethics;

d) The Board of Trustees of the PBHG Funds instructed its own legal counsel to review and advise on the design and enactment of reforms proposed by PBA, including a set of policies to strengthen PBA's capacity to prevent market timing activity in the PBHG Funds; the adoption by PBA of an enhanced Code of Ethics governing all employees; a prohibition of investments in hedge funds and limited partnerships without certain certifications or other information that will allow PBA to assure itself of the lack of a conflict of interest on the part of the employee; enhanced reporting requirements with respect to all employee accounts holding PBHG funds; certain fair value pricing procedures; and a new policy on the disclosure of portfolio holdings;

e) PBA retained outside legal counsel to oversee an internal review of past trading practices in the PBHG Funds. Outside legal counsel reported findings directly to the PBHG Board and, in November 2003, made a presentation of its findings to the staff of the Securities and Exchange Commission; and

f) PBA retained an independent accounting firm to review the company's internal controls and procedures under the Statement on Auditing Standards No. 70, Service Organizations, with the findings to be provided to the Board of Trustees.

32. PBA will use its best efforts to obtain the agreement of the PBHG Funds to operate in accordance with the following governance policies and practices:

a) No more than 25% of the members of the Board of Trustees of the PBHG Funds will be persons who either (a) were directors, officers or employees of PBA at any point during the preceding 10 years or (b) are interested persons, as defined in the Investment Company Act, of the PBHG Funds or of PBA. In the event that the PBHG Board of Trustees fails to meet this requirement at any time due to the death, resignation, retirement or removal of any independent Trustee, the independent Trustees will take such steps as may be necessary to bring the board in compliance within a reasonable period of time;

b) No chairman of the Board of Trustees of the PBHG Funds will either (a) have been a director, officer or employee of PBA at any point during the preceding 10 years or (b) be an interested person, as defined in the Investment Company Act, of the PBHG Funds or of PBA or any fund advised by PBA;

c) Any person who acts as counsel to the independent Trustees of any PBHG funds will be an "independent legal counsel" as defined by Rule 0-1 under the Investment Company Act.

d) No action will be taken by the Board of Trustees of the PBHG Funds or by any committee thereof unless such action is approved by a majority of the members of the Board of Trustees or of such committee, as the case may be, who are neither (i) persons who were directors, officers or employees of PBA at any point during the preceding 10 years nor (ii) interested persons, as defined in the Investment Company Act, of the fund or of PBA. In the event that any action proposed to be taken is opposed by a vote of one or more of the independent Trustees of the PBHG Funds, then the PBHG Funds will disclose such proposal, the related board vote, and the reason, if any, for such independent Trustee(s)' vote against the proposal in its shareholder report for such period.

e) Commencing in 2005 and not less than every fifth calendar year thereafter, the PBHG Funds will hold a meeting of shareholders at which the Board of Trustees will be elected;

f) Effective on the date of August 1, 2004, the PBHG Funds shall comply with rule 38a-1 notwithstanding the October 5, 2004 compliance date for each rule as adopted by the Commission. See Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Rel. No. 26299 (Dec. 17, 2003) (adopting release). See also Section III, paragraph 34.f., below.

33. Ongoing Cooperation. PBA shall cooperate fully with the Commission in any and all investigations, litigations or other proceedings relating to or arising from the matters described in the Order and/or set forth in the complaint in SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA). In connection with such cooperation, PBA has undertaken and will undertake:

a) To produce, without service of a notice or subpoena, any and all documents and other information reasonably requested by the Commission's staff;

b) To use its best efforts to cause its employees to be interviewed by the Commission's staff at such times as the staff reasonably may direct;

c) To use its best efforts to cause its employees to appear and testify truthfully and completely without service of a notice or subpoena in such investigations, depositions, hearings or trials as may be requested by the Commission's staff;

d) That in connection with any testimony of PBA to be conducted at deposition, hearing or trial pursuant to a notice or subpoena, PBA:

(1) Agrees that any such notice or subpoena for PBA's appearance and testimony may be served by regular mail on its attorneys, as set forth below:

Thomas S. Martin, Esq. Joanna Shally, Esq. Shearman & Sterling LLP 599 Lexington Ave. New York, NY 10022-6069; and

(2) Agrees that any such notice or subpoena for PBA's appearance and testimony in an action pending in a United States District Court may be served, and may require testimony, beyond the territorial limits imposed by the Federal Rules of Civil Procedure;

e) That it waive, upon a request by the Commission's staff sent in writing to the names and address set forth above in Section III, paragraph 33.d.1., any evidentiary privileges or protections from discovery in connection with the matters described in the Order and/or set forth in the complaint in SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA) through the date of the filing of that complaint; and further,

f) That it waive, upon a request by the Commission's staff sent in writing to the names and address set forth above in Section III, paragraph 33.d.1., any evidentiary privileges or protections from discovery in connection with any internal investigation of the matters described in the Order and/or set forth in the complaint in SEC v. Pilgrim, et al., Civil Action No. 03-CV-6341-HB (E.D. PA).

Undertakings

34. Compliance and Ethics Oversight Structure. PBA shall maintain a compliance and ethics oversight infrastructure having the following characteristics:

a) PBA shall maintain a Code of Ethics Oversight Committee having responsibility for all matters relating to issues arising under the PBA Code of Ethics. The Code of Ethics Oversight Committee shall be comprised of senior executives of PBA's operating businesses. PBA shall hold at least quarterly meetings of the Code of Ethics Oversight Committee to review violations of the Code of Ethics, as well as to consider policy matters relating to the Code of Ethics. PBA shall report on issues arising under the Code of Ethics, including all violations thereof, to the Chief Compliance Officer of the PBHG Funds with such frequency as that individual may instruct, and in any event at least quarterly, provided however that any material violation shall be reported to the Chief Compliance Officer of the PBHG Funds promptly.

b) PBA shall establish an Internal Compliance Controls Committee to be chaired by PBA's Chief Compliance Officer, which Committee shall have as its members senior executives of PBA's operating businesses. Notice of all meetings of the Internal Compliance Controls Committee shall be given to the Chief Compliance Officer of the PBHG Funds, who shall be invited to attend and participate in such meetings. The Internal Compliance Controls Committee shall review compliance issues throughout the business of PBA, endeavor to develop solutions to those issues as they may arise from time to time, and oversee implementation of those solutions. The Internal Compliance Controls Committee shall provide reports on internal compliance matters to the Audit Committee of the Board of Trustees of the PBHG Funds with such frequency as the independent Trustees of such funds may instruct, and in any event at least quarterly. PBA shall also provide to the Audit Committee of PBA the same reports of the Code of Ethics Oversight Committee and the Internal Compliance Controls Committee that it provides to the Audit Committee of the Board of Trustees of the PBHG Funds.

c) The responsibilities of the Chief Compliance Officer of PBA shall include matters related to conflicts of interests.

d) PBA shall require the Chief Compliance Officer of PBA to report to the independent Trustees of the PBHG Funds any breach of fiduciary duty and/or the federal securities laws of which he or she becomes aware in the course of carrying out his or her duties, with such frequency as the independent Trustees may instruct, and in any event at least quarterly, provided however that any material breach (i.e., any breach that would be important, qualitatively or quantitatively, to a reasonable Trustee) shall be reported promptly.

e) PBA shall establish a corporate ombudsman to whom PBA employees may communicate concerns about PBA business matters that they believe implicate matters of ethics or questionable practices. PBA shall establish procedures to investigate matters brought to the attention of the ombudsman, and these procedures shall be presented for review and approval by the independent Trustees of the PBHG Funds. PBA shall also review matters brought to the attention of the ombudsman, along with any resolution of such matters, with the independent Trustees of the PBHG Funds with such frequency as the independent Trustees may instruct.

f) Effective on the date of August 1, 2004, PBA will comply with Rule 206(4)-7, notwithstanding the October 5, 2004 compliance date for each rule as adopted by the Commission. See Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Rel. No. 26299 (Dec. 17, 2003) (adopting release). See also, Section III., paragraph 32.f., above.

35. Independent Compliance Consultant. PBA shall also comply with the following undertakings:

a) PBA shall retain, within 30 days of the date of entry of the Order, the services of an Independent Compliance Consultant acceptable to the staff of the Commission and a majority of the independent Trustees of the PBHG Funds. The Independent Compliance Consultant's compensation and expenses shall be borne exclusively by PBA or its affiliates. PBA shall require that the Independent Compliance Consultant shall conduct a comprehensive review of PBA's supervisory, compliance, and other policies and procedures designed to prevent and detect breaches of fiduciary duty, breaches of the Code of Ethics and federal securities law violations by PBA and its employees. This review shall include, but shall not be limited to, a review of PBA's market timing controls across all areas of its business; a review of the PBHG Funds' pricing practices that may make those funds vulnerable to market timing; a review of the PBHG Funds' utilization of short term trading fees and other controls for deterring excessive short term trading; a review of PBA's policies and procedures concerning conflicts of interest, including conflicts arising from advisory services to multiple clients; and a review of PBA's controls with respect to the prevention of the misuse of material nonpublic information. PBA shall cooperate fully with the Independent Compliance Consultant and shall provide the Independent Compliance Consultant with access to its files, books, records, and personnel as reasonably requested for the review.

b) PBA shall require that, at the conclusion of the review, which in no event shall be more than 120 days after the date of entry of the Order, the Independent Compliance Consultant submit a Report to PBA, the Board of Trustees of the PBHG Funds, and to the staff of the Commission. The Report shall address the issues described in Section III, paragraph 35.a., above, and shall include a description of the review performed, the conclusions reached, the Independent Compliance Consultant's recommendations for changes in or improvements to policies and procedures of PBA and the PBHG Funds, and a procedure for implementing the recommended changes in or improvements to PBA's policies and procedures.

c) PBA shall adopt all recommendations with respect to PBA contained in the Report of the Independent Compliance Consultant; provided, however, that within 150 days after the date of entry of the Order, PBA shall in writing advise the Independent Compliance Consultant, the Board of Trustees of the PBHG Funds and the staff of the Commission of any recommendations that it considers to be unnecessary or inappropriate. With respect to any recommendation that PBA considers unnecessary or inappropriate, PBA need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose.

d) As to any recommendation with respect to PBA's policies and procedures on which PBA and the Independent Compliance Consultant do not agree, such parties shall attempt in good faith to reach an agreement within 180 days of the date of entry of the Order. In the event PBA and the Independent Compliance Consultant are unable to agree on an alternative proposal acceptable to the staff of the Commission, PBA will abide by the determinations of the Independent Compliance Consultant.

e) PBA (i) shall not have the authority to terminate the Independent Compliance Consultant, without the prior written approval of the majority of the independent Trustees of the PBHG Funds and the staff of the Commission; (ii) shall compensate the Independent Compliance Consultant, and persons engaged to assist the Independent Compliance Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; (iii) shall not be in and shall not have an attorney client relationship with the Independent Compliance Consultant and shall not seek to invoke the attorney client or any other doctrine or privilege to prevent the Independent Compliance Consultant from transmitting any information, reports, or documents to the Board of Trustees of the PBHG Funds or to the Commission.

f) PBA shall require that the Independent Compliance Consultant, for the period of the engagement and for a period of two years from completion of the engagement, shall not enter into any employment, consultant, attorney client, auditing or other professional relationship with PBA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. PBA shall require that any firm with which the Independent Compliance Consultant is affiliated in performance of his or her duties under the Order shall not, without prior written consent of the independent Trustees of the PBHG Funds and the staff of the Commission, enter into any employment, consultant, attorney client, auditing or other professional relationship with PBA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.

36. Periodic Compliance Review. Commencing in 2006, and at least once every third year thereafter, PBA shall undergo a compliance review by a third party, who is not an interested person, as defined in the Investment Company Act, of PBA. At the conclusion of the review, the third party shall issue a report of its findings and recommendations concerning PBA's supervisory, compliance, and other policies and procedures designed to prevent and detect breaches of fiduciary duty, breaches of the Code of Ethics and federal securities law violations by PBA and its employees in connection with their duties and activities on behalf of and related to the PBHG Funds. Each such report shall be promptly delivered to PBA's Internal Compliance Controls Committee and to the Chief Compliance Officer of the PBHG Funds.

37. Distribution of Disgorgement and Penalty. PBA shall also comply with the following undertakings:

a) PBA shall retain, within 30 days of the date of entry of the Order, the services of an Independent Distribution Consultant acceptable to the staff of the Commission and to the majority of the independent Trustees of the PBHG Funds. The Independent Distribution Consultant's compensation and expenses shall be borne exclusively by PBA or its affiliates. PBA shall cooperate fully with the Independent Distribution Consultant and shall provide the Independent Distribution Consultant with access to its files, books, records, and personnel as reasonably requested for the review. PBA shall require that the Independent Distribution Consultant develop a Distribution Plan for the distribution of the disgorgement and penalty set forth in Section IV., paragraph D., below, and any interest or earnings thereon, according to a methodology developed in consultation with PBA and acceptable to the staff of the Commission and the independent Trustees of the affected PBHG funds. The Distribution Plan shall provide for investors to receive, from the monies available for distribution, in order of priority, (i) their proportionate share of losses suffered by the fund due to market timing, and (ii) a proportionate share of advisory fees paid by funds that suffered such losses during the period of such market timing.

b) PBA will require that the Independent Distribution Consultant submit a Distribution Plan to PBA and the staff of the Commission no more than 100 days after the entry of the Order.

c) The Distribution Plan developed by the Independent Distribution Consultant shall be binding unless, within 130 days after the date of entry of the Order, PBA or the staff of the Commission advises, in writing, the Independent Distribution Consultant of any determination or calculation from the Distribution Plan that it considers to be inappropriate and states in writing the reasons for considering such determination or calculation inappropriate.

d) With respect to any determination or calculation with which PBA or the staff of the Commission do not agree, such parties shall attempt in good faith to reach an agreement within 160 days of the date of entry of the Order. In the event that PBA and the staff of the Commission are unable to agree on an alternative determination or calculation the determinations and calculations of the Independent Distribution Consultant shall be binding.

e) PBA will require that within 175 days of the date of the entry of the Order, the Independent Distribution Consultant submit the Distribution Plan for the administration and distribution of disgorgement and penalty funds pursuant to Rule 1101 of the Commission's Rules of Practice [17 C.F.R. §201.1101]. Following a Commission order approving a final plan of disgorgement as provided in Rule 1104 of the Commission's Rules of Practice [17 C.F.R. §201.1104], PBA shall require that the Independent Distribution Consultant, with PBA, take all necessary and appropriate steps to administer the final plan for distribution of disgorgement and penalty funds.

f) PBA shall require that, the Independent Distribution Consultant, for the period of the engagement and for a period of two years from completion of the engagement, not enter into any employment, consultant, attorney client, auditing or other professional relationship with PBA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. PBA shall require that any firm with which the Independent Distribution Consultant is affiliated in performance of his or her duties under the Order not, without prior written consent of the independent Trustees of the PBHG Funds and the staff of the Commission, enter into any employment, consultant, attorney client, auditing or other professional relationship with PBA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.

38. Certification. No later than twenty-four months after the date of entry of the Order, the chief executive officer of PBA shall certify to the Commission in writing that PBA has fully adopted and complied in all material respects with the undertakings set forth in Section III, paragraph 34. through Section III, paragraph 39. herein and with the recommendations of the Independent Compliance Consultant or, in the event of material non-adoption or non-compliance, shall describe such material non-adoption and non-compliance.

39. Recordkeeping. PBA shall preserve for a period not less than six years from the end of the fiscal year last used, the first two years in an easily accessible place, any record of PBA's compliance with the undertakings set forth in Section III, paragraph 34.through Section III, paragraph 39., herein.

40. Deadlines. For good cause shown, the Commission's staff may extend any of the procedural dates set forth above.

41. Other Obligations and Requirements. Nothing in the Order shall relieve PBA or any PBHG fund of any other applicable legal obligation or requirement, including any rule adopted by the Commission subsequent to the Order.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent's Offer. Accordingly, it is hereby ORDERED, effective immediately, that:

A. Pursuant to Section 203(e) of the Advisers Act, PBA is hereby censured;

B. Pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act, PBA shall cease and desist from committing or causing any violations and any future violations of Sections 204A, 206(1), and 206(2) of the Advisers Act, and Section 34(b) of the Investment Company Act.

C. PBA shall comply with the undertakings enumerated in Section III, paragraphs 34 through 39.

D. Disgorgement and Civil Money Penalties

1. PBA shall pay disgorgement in the total amount of $40,000,000 ("Disgorgement") and a civil money penalty in the amount of $50,000,000 ("Penalty"), for a total payment of $90,000,000.

2. There shall be, pursuant to Section 308(a) of the Sarbanes Oxley Act of 2002, a Fair Fund established for the funds described in Section IV.D.1. Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, PBA agrees that it shall not, in any Related Investor Action, benefit from any offset or reduction of any investor's claim by the amount of any Fair Fund distribution to such investor in this proceeding that is proportionately attributable to the civil penalty paid by PBA (APBA Penalty Offset@). If the court in any Related Investor Action grants such an offset or reduction, PBA agrees that it shall, within 30 days after entry of a final order granting the offset or reduction, notify the Commission=s counsel in this action and pay the amount of the PBA Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed against PBA in this proceeding. For purposes of this paragraph, a ARelated Investor Action@ means a private damages action brought against PBA by or on behalf of one or more investors based on substantially the same facts as those set forth in the Order.

3. PBA shall, within 20 days of the entry of this Order, pay the Disgorgement and Penalty described in Section IV.D.1. into an interest bearing escrow account at a federally insured banking institution with deposits of not less than $100 billion pursuant to an escrow agreement not unacceptable to the staff of the Commission. Such agreement shall, among other things: (1) require that the escrow agent be bonded appropriately; and (2) provide that the funds in such escrow account be disbursed only pursuant to order of the Commission. PBA shall be responsible for all costs associated with the escrow account.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes