UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION INVESTMENT ADVISERS ACT OF 1940 Release No. 1569 / July 8, 1996 INVESTMENT COMPANY ACT OF 1940 Release No. 22055 / July 8, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9037 ------------------------- : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 203(e) AND (f) VECTOR INDEX ADVISORS, : OF THE INVESTMENT ADVISERS ACT INC.; and : OF 1940 AND SECTIONS 9(b) AND (f) STEVEN H. ADLER : OF THE INVESTMENT COMPANY ACT OF : 1940, MAKING FINDINGS, IMPOSING : REMEDIAL SANCTIONS, AND ORDER TO : CEASE AND DESIST ------------------------- I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 203(e) and (f) of the Investment Advisers Act of 1940 ("IAA") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("ICA") against Vector Index Advisors, Inc. ("Vector") and Steven H. Adler ("Adler") (collectively, the "Respondents"). II. In anticipation of the institution of these proceedings, Respondents Vector and Adler have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, Respondents Vector and Adler, by their Offers, consent to the entry of this Order Instituting Proceedings Pursuant to Sections 203(e) and (f) of the Investment Advisers Act of 1940 and Sections 9(b) and (f) of the Investment Company Act of 1940, Making Findings, Imposing Remedial Sanctions, and Order to Cease and Desist ("Order"), without admitting or denying the findings set forth herein, except the jurisdiction of the Commission, which is admitted, and paragraphs III. A., B. and C., below, which are also admitted, consent to the entry of the findings, and imposition of the sanctions set ==========================================START OF PAGE 2====== forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e) and (f) of the IAA and Sections 9(b) and (f) of the ICA be and hereby are instituted. III. On the basis of this Order and Respondents Vector's and Adler's Offers, the Commission finds that:-[1]- A. At all times material hereto, Vector has been an investment adviser registered with the Commission pursuant to the IAA. B. At all times material hereto, Vector has provided investment advisory services to and has been an affiliated person of ASM Fund, Inc. ("ASM"), an investment company registered with the Commission pursuant to the ICA. C. At all times material hereto, Adler (a) has been president and a director of both Vector and ASM; (b) has controlled the operations of Vector and ASM; and (c) has been an affiliated person of ASM. D. For the period beginning approximately October 31, 1993, and continuing to at least October 26, 1994, Vector willfully-[2]- violated Section 17(a)(3) of the ICA in that Vector, an affiliated person of ASM, borrowed $420,775 from ASM by means other than as permitted under Section 21(b) of the ICA and failed to repay this amount to ASM for approximately one year. The borrowing arose when Vector failed to reimburse ASM on a timely basis for $420,775 of expenses which Vector had obligated itself to pay on behalf of ASM. On October 26, 1994, Vector repaid the amount it owed ASM. Vector's reimbursement of this amount was disclosed to ASM's shareholders and in ASM's reports filed with the Commission's staff. ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Vector's and Adler's offers of settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. -[2]- "Willfully" as used in this Order means intentionally committing the act which constitutes the violation. There is no requirement that the actor also be aware that he is violating one of the Acts or its rules. See Tager v. SEC, 344 F.2d 5, 8 (2nd Cir. 1965). ==========================================START OF PAGE 3====== E. For the period beginning approximately October 31, 1993, and continuing to at least October 26, 1994, Adler willfully aided and abetted and caused violations of Section 17(a)(3) of the ICA in that Adler caused Vector, an affiliate of ASM, to borrow $420,775 from ASM by means other than pursuant to Section 21(b) of the ICA and caused Vector to fail to repay this amount to ASM for approximately one year. The borrowing arose as set forth in paragraph III.D., above. Adler, who controlled the operations of Vector and ASM and who was aware of Vector's outstanding reimbursement obligation to ASM, failed to cause Vector to reimburse ASM on a timely basis for these expenses. IV. Based upon the foregoing, it is in the public interest to impose the sanctions specified in the Offers submitted by Respondents Vector and Adler. In determining to accept those Offers, the Commission considered the remedial acts to be undertaken by Respondents Vector and Adler. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 9(f) of the ICA that: A. Vector and Adler shall cease and desist from committing or causing any violation and any future violation of Section 17(a)(3) of the ICA. B. Vector and Adler shall comply with the following undertakings: 1. Vector and Adler undertake not to serve as an investment adviser or an affiliated person, respectively, of any investment company, including but not limited to ASM, unless the following conditions are met: a. for at least three years following entry of the Order a majority of the members of the board of directors of any such investment company shall not be interested persons of any investment adviser, distributor or administrator of such investment company; b. for at least three years following entry of the Order the selection of Fund counsel for any such investment company shall be committed by the investment company's board of directors to the discretion of a majority of the investment company's directors who are not interested persons of any investment ==========================================START OF PAGE 4====== adviser, distributor or administrator of the investment company; c. for at least three years following entry of the Order, the board of directors of any such investment company shall have an audit committee comprised entirely of directors who are not interested persons of any investment adviser, distributor or administrator of the investment company; and d. for at least three years following entry of the Order the auditors for any such investment company selected by the investment company's board of directors, subject to shareholder vote in accordance with the ICA, shall be approved by the audit committee of the investment company's board of directors and shall not be unacceptable to the Commission's staff. 2. For at least three years following entry of the Order Vector and Adler undertake that Vector, when having entered into an agreement to reimburse expenses to any investment company to which Vector renders investment advisory services, will not collect any advisory fee from any such investment company unless: (i) the investment company's officers first shall have reported to the investment company's audit committee in writing each month that the amount of the advisory fee has first been set off against any outstanding reimbursement of expense obligation of Vector in compliance with law, and (ii) the investment company's officers have provided the investment company's independent public accountants with data supporting the computation of the advisory fee and the expense accruals of the investment company for the year to date, and (iii) the investment company's independent public accountants have reported to the investment company's audit committee in writing that the computation and the premises used in connection with accrual of expenses are reasonable and in accordance with applicable accounting standards. 3. For at least three years following entry of the Order Vector and Adler undertake that with respect to any investment company to which Vector renders investment advisory services, Vector shall provide to the investment company's audit committee, or, in the absence of an audit committee, to the ==========================================START OF PAGE 5====== investment company's board of directors, a report no less frequently than monthly describing Vector's financial condition and Vector's ability to satisfy any reimbursement obligation owed to the investment company. 4. Vector and Adler undertake that, within thirty (30) days from the date of entry of the Order, Vector shall, at its expense, retain a qualified independent consultant, knowledgeable in all aspects of investment company and investment adviser operations and not unacceptable to the Commission's staff, who shall: a. conduct a comprehensive compliance audit of Vector with respect to its investment management operations; b. recommend policies, procedures and controls to be implemented by Vector designed reasonably to prevent and detect violations of the federal securities laws, including, but not limited to, the recurrence of the violations alleged herein; and c. provide a written report of its compliance audit and recommendations to Vector's board of directors, ASM's audit committee, ASM's board of directors, and to the Commission's staff, no later than sixty (60) days after its retention. 5. Vector and Adler undertake to provide an affidavit to the Commission's staff no later than one hundred eighty (180) days after completion of the comprehensive compliance audit referred to in paragraph 4, above, certifying that Vector has implemented the recommendations of the independent consultant and setting forth the steps undertaken by Vector and Adler to implement these recommendations. Such affidavit shall be delivered to John C. Mattimore and James E. Burt IV, Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. IT IS HEREBY FURTHER ORDERED pursuant to Section 203(i) of the IAA and Section 9(d) of the ICA, that within sixty (60) days from the entry of the Order, Vector and Adler each shall pay an administrative money penalty in the amount of five thousand dollars ($5,000.00) to the United States Treasury. Such payment shall be: (a) made by United States postal money order, ==========================================START OF PAGE 6====== certified check, bank cashier's check, or bank money order; (b) made payable to the United States Securities and Exchange Commission and bearing on its face the caption "Vector Index Advisors, Inc. (A-1430);" (c) transmitted to the Securities and Exchange Commission, Office of the Comptroller, Room 2067, Stop 2-5, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter that specifies Vector or Adler, respectively, as the Respondent in this proceeding, the file number of this proceeding and the Commission's case number (A- 1430), a copy of which cover letter and money order or check shall be sent to John C. Mattimore and James E. Burt IV, Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. By the Commission. Jonathan G. Katz Secretary