United States of America
In the Matter of
|ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940|
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 (the "Advisers Act") against Massachusetts Financial Services Company ("MFS" or "Respondent").
In anticipation of the institution of these proceedings, MFS has submitted an Offer of Settlement ( the "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 set forth herein, except as to the Commission's jurisdiction over the Respondent and over the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
This matter concerns MFS' failure to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material non-public information. MFS is a registered investment adviser with the Commission. MFS, and in particular its fixed income department, paid several outside consultants to gather information for MFS from various sources. The consultants are sometimes in possession of material non-public information. Taking into consideration these aspects of MFS' business, the firm's policies and procedures regarding the receipt and use of material non-public information should have identified the potential for receiving such information from consultants. In addition, the firm's procedures did not address trading in debt securities, including securities issued by the federal government, although such securities comprised a significant segment of MFS' trading business.
MFS is an investment advisory firm that is and, at all times relevant to this Order, was registered with the Commission as an investment adviser under the Advisers Act. MFS has its headquarters in Boston, Massachusetts. MFS provides investment advisory services to a family of about 150 open- and closed-end registered investment companies. These funds have over $80 billion under management.
On the morning of October 31, 2001, Peter Davis, a Washington, D.C.-based political consultant hired by MFS, among others, disclosed material, non-public information to Steven Nothern, then a senior portfolio manager employed in the fixed income department of MFS. Davis left a telephone voice mail for Nothern in which Davis stated that the U.S. Treasury Department was going to announce the suspension of the 30-year bond in a press announcement that would be released at 10:00 a.m., and which was under embargo until that time. While the information was still non-public, Nothern and three other MFS fund managers purchased $65 million par value of 30-year bonds for allocation among several of the fixed income portfolios that they managed.
The Treasury Department's announcement that it would no longer issue the 30-year bond had a dramatic effect on the price and yield of the 30-year bond in public trading. Over the course of the day on October 31, the bond price increased over $5.00 and the yield decreased 33 basis points from the previous day. The changes in price and yield in the 30-year bond following the announcement were the largest one-day changes since October 1987.
MFS has a written manual entitled "STATEMENT OF GUIDELINES WITH RESPECT TO RECEIPT AND USE OF MATERIAL NON-PUBLIC INSIDE INFORMATION." The manual sets forth, among other things, prohibitions on the misuse of material non-public inside information. "Inside Information" subject to these prohibitions and procedures is defined as "information attributable, directly or indirectly, to the company (or its insiders)." In addition to the traditional insiders (officers and directors), the manual also lists several other types of "insiders," such as accountants, lawyers, investment bankers and consultants for the company.
During the relevant period, MFS retained numerous consultants who provided a wide range of information and analysis concerning the financial markets, as well as political, budgetary, and regulatory developments in Washington. The fixed income department alone used at least twelve such consultants, not including Peter Davis. MFS paid these consultants for their services, and they provided information to MFS for its use and benefit.
MFS' procedures manual did not describe the potential that consultants like Peter Davis could obtain and provide material non-public information to the firm. No written guidelines expressly discussed the use of consultants by MFS or the handling of information obtained from consultants. The firm's manual only refers to inside information received from company insiders and their agents. The manual does not address the use of confidential Government information or confidential information received from MFS' paid consultants.
Furthermore, the MFS manual, while referring to "company" or "corporate" information, does not expressly address the potential for misuse of material non-public information relative to debt securities, and in particular Government-issued securities. Yet, MFS' fixed income department invests primarily in fixed income securities, many of which are Government-issued debt instruments.
Congress has expressed its strong intent to preserve the fairness and integrity of the Government securities markets.2 Further, the antifraud provisions of the federal securities laws, which prohibit among other things insider trading, apply to debt securities, including Government securities, as well as to equity securities. See SEC v. Morse, 92 Civ. 64 (E.D.Ky. June 23, 1992); In re Blythe & Co., 43 S.E.C. 1037 (1969); United States v. Rough, Crim. No. 88-425 (D.N.J. 1988).
Section 204A of the Advisers Act requires every investment adviser registered with the Commission 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, in violation of the Advisers Act or the Securities Exchange Act of 1934 or the rules or regulations thereunder, of material, non-public information by such investment adviser or any person associated with such investment adviser. The securities industry has long been aware of the need for effective compliance policies to guard against the risk of misuse of material non-public information and to tailor those policies to the specific activities of the individual firm. See, e.g., In re Guy P. Wyser-Pratte, et al., Exch. Act Rel. No. 44283; Advisers Act Rel. No. 1943 (May 9, 2001). For the reasons described above, taking into consideration MFS', and in particular the fixed income department's, regular use of paid consultants for their knowledge, contacts, and information concerning the federal Government, as well as MFS' significant investments in Government-issued debt securities, MFS' policies were not reasonably designed to prevent the misuse of material non-public information.
As a result of the conduct discussed above, MFS willfully violated Section 204A of the Advisers Act.3
In determining to accept the Offer, the Commission considered the cooperation afforded the Commission staff by MFS, including that the firm brought this matter to the staff's attention promptly.
MFS, from its corporate funds and not from its portfolio funds, has undertaken to reimburse the broker/dealer, who sold MFS the 30-year bonds, the amount of $717,858, representing losses by the broker/dealer from selling 30-year bonds to MFS on October 31, 2001 and prejudgment interest on that amount. In determining whether to accept the Offer, the Commission has considered this undertaking.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent MFS' Offer.
ACCORDINGLY, IT IS ORDERED that:
A. Pursuant to Section 203(e) of the Advisers Act, MFS is censured;
B. Pursuant to Section 203(k) of the Advisers Act, MFS shall cease and desist from committing or causing any violations and any future violations of Section 204A of the Advisers Act;
IT IS FURTHER ORDERED that MFS shall, within seven (7) days of the entry of this Order, pay a civil money penalty in the amount of $200,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier=s check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies MFS as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Lawrence A. West, Associate Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0801.
IT IS FURTHER ORDERED that within ninety (90) days of the entry of this Order 1) MFS' General Counsel's office shall complete a comprehensive review of the policies, procedures and practices maintained and implemented by the Respondent pursuant to Section 204A of the Advisers Act that relate to the findings of this Order;
2) MFS shall adopt, implement and maintain policies, procedures and practices pursuant to Section 204A of the Advisers Act that are consistent with the findings of this Order; and 3) MFS shall submit a report, approved by and signed by MFS' General Counsel's office, to the staff of the Commission detailing the results of the review by the General Counsel's office and the new policies, procedures and practices adopted pursuant to Section 204A of the Advisers Act.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 The House report to the Government Securities Act Amendments of 1993 emphasized "reducing the disparity of information that may exist between market `insiders' and `outsiders' and providing public investors with more equal access to information that is available to primary and other dealers." H.R. Rep. No. 103-255, at 27 (1993). Similarly, the Senate report found that "expanded information access serves the public interest by enhancing customer protection and providing for fair competition among market participants." S. Rep. No. 103-109, at 19 (1993). The report also stated, "The U.S. government securities market is one of the largest and most liquid securities markets in the world. It is also the most important securities market for U.S. taxpayers.... Therefore, it is essential that when the Treasury auctions its bills, notes, and bonds, it must have broad participation from investors, who have confidence in the integrity of the market and are willing to participate in it." Id. at 7.
3 "Willfully" as used in this Order means intentionally committing the act which constitutes the violation. See, Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that he is violating one of the Rules or Acts.
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