Speech by SEC Staff:
|The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.|
Thank you and good morning. It is a pleasure to be here with you today. But first as always, I must indicate that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners, or my colleagues on the Commission staff.
Since I last spoke to this group, the Commission has faced new challenges in adapting investment management regulation to the broad-ranging mandates of the Sarbanes-Oxley Act of 2002 and the USA PATRIOT Act of 2001. In the aftermath of 9/11, as well as Enron, WorldCom, and other corporate failures, and Congress's response to these events, the Commission is in the process of shaping new regulatory initiatives affecting all sectors of the investment management industry, including the variable products industry.
You, the professionals working in this industry, also face new challenges. You must advise your companies how to comply with the new regulatory requirements that are being implemented under these legislative mandates. You must help your companies remain financially viable in a difficult envirionment, while at the same time ensuring that your companies conduct their activities in a lawful and ethically responsible manner, and that new and increasingly complex variable insurance products are offered and sold on the basis of full and fair disclosure. And, in a number of cases, all this must be accomplished in an environment of lay-offs and cost-reduction programs.
Perhaps lost in the news regarding the Commission recently has been the significant accomplishments of the Commission in the investment management area under Chairman Pitt's leadership. Significant initiatives and actions include: issuing relief for the investment management industry in the wake of the events of September 11th and the indictment of Arthur Andersen, various rules to implement the Sarbanes-Oxley Act and the USA Patriot Act, proposed rules regarding mutual fund and investment adviser proxy voting, proposed amendments to modernize the mutual fund advertising rules, the issuance of a concept release on actively-managed exchange traded funds and the approval of the first exchange-traded funds based on fixed-income indices, amendments to modernize custody rules for investment companies and investment advisers, adoption of amendments to the fund merger rule, proposed amendments to allow certain affiliated transactions consistent with investor protection, the launching of a fact-finding investigation into issues associated with hedge funds, a proposed rule permitting internet investment advisers to register with the Commission, the launch of the Investment Adviser Public Disclosure Website, declaring effective the registration of an all-electric variable annuity product and adoption of a new registration form for variable life insurance policies. Clearly, we have been busy under Chairman Pitt's stewardship.
I thought it would be most useful for you if I reviewed several of these recent regulatory initiatives and discuss, in particular, how these initiatives relate to the variable products industry.
As I mentioned, the Commission has been devoting substantial time and attention to implementing the requirements of the Sarbanes-Oxley Act of 2002, as they apply to investment companies. With the enactment of Sarbanes-Oxley, President Bush and the Congress set the tone for broad, swift reform designed to restore investor confidence in our markets through sweeping corporate disclosure and financial reporting initiatives. The Commission has been busy fulfilling Congress' mandate under the tight deadlines set forth in the Act.
Among other things, the Act creates a new oversight board for the accounting profession, mandates new measures intended to promote auditor independence, adds new disclosure requirements for public companies, and strengthens the criminal penalties for securities fraud.
Section 302 of the Sarbanes-Oxley Act also imposes certain certification requirements to enhance the direct responsibility of senior corporate management for financial reporting and for the quality of financial disclosures made by public companies, including investment companies. This past August, the Commission adopted rules under Section 302 to implement the certification requirement for registered investment companies. Rule 30a-2 requires the principal executive and financial officers of a registered investment company that files periodic reports under the Securities Exchange Act to certify the company's semi-annual reports on Form N-SAR, as well as the financial statements on which the financial information in Form N-SAR is based. The instructions to Form N-SAR require the specified certification to be filed as an exhibit to the Form.
With respect to insurance companies, we are aware that the new regulations raise challenges for compliance. Because separate accounts organized as unit investment trusts ("UITs") file reports on Form N-SAR, they clearly are covered by the rule. Rule 30a-2 requires that each N-SAR filed by a UIT include a certification stating that the certifying officer has reviewed the report; that based on his or her knowledge, the report does not contain any untrue statement of a material fact or any material omissions; and that he or she and any other certifying officers are responsible for establishing and maintaining disclosure controls and procedures that ensure that material information is made known to them and that they have evaluated those controls and procedures and reported on their conclusions within 90 days prior to the report filing date. Rule 30a-2 also requires that the certifying officer has disclosed to the UIT's auditors all significant deficiencies in the internal controls that could adversely affect reporting, as well as any fraud involving employees who have a role in internal controls. There is also a requirement to report whether or not there were significant changes in internal controls or significant factors affecting those controls, including corrective actions. This certification must be presented in the format set forth in the amendments to Form N-SAR.
As you know, UITs are unmanaged and are not themselves corporate entities and hence do not themselves have a principal executive officer or principal financial officer to certify a report. Rule 30a-2 states that the certification must be signed by principal executive officers and principal financial officers of the investment company or persons performing similar functions at the time of filing the report. Our release accompanying the final rule states that, in the case of a UIT, the required certification should be signed by personnel of the sponsor, trustee, depositor or custodian who perform functions similar to those of a principal executive officer and principal financial officer on behalf of the trust. In the variable products context, this typically would mean officers of the insurance company.
The new certification rule requires that the signing officers certify that the financial information included in the periodic report and the financial statements on which it is based, fairly present, in all material respects, the financial condition, results of operations, changes in net assets, and cash flows of the company. Because UITs are not required to transmit reports to their shareholders containing their financial statements, and Form N-SAR does not require UITs to report financial information based on their financial statements, the certification requirements applicable to UITs do not include the requirement that the signing officers certify the financial information.
The Commission also has pending a proposed rule designed to better implement the intent of Section 302 of Sarbanes-Oxley by requiring registered management investment companies to certify the shareholder reports that they file with the Commission. This certification would be made on proposed new Form N-CSR. Unit investment trusts generally are not required to transmit reports to shareholders containing their financial statements and they are not included in this proposed requirement. The Commission also proposed a rule that would require every registered investment company to maintain disclosure controls and procedures designed to ensure that the information required in its disclosure documents is recorded, processed, summarized, and reported on a timely basis. We are currently reviewing the comments on these proposals, including the issue of whether certification should be required for both forms N-SAR and N-CSR.
There are a number of other issues under Sarbanes-Oxley that will have an impact on investment companies. On October 16, the Commission proposed new rules that would require registered management investment companies to disclose whether the companies, their investment advisers and principal underwriters have each adopted a code of ethics for their senior executive and financial officers. The rules would not require companies to adopt codes of ethics, but only to disclose whether they have such codes. We recognize that under Rule 17j-1 of the Investment Company Act, funds are already required to have codes of ethics designed to deter conflicts of interest by advisory personnel when they buy or sell securities for their own accounts. However, the proposed new disclosure requirements are designed to address a broader range of ethical conduct issues including: the handling of conflicts of interest between personal and professional relationships; full, fair, and accurate filings with the Commission; and compliance with applicable laws and regulations. Indeed, many codes of ethics of funds and advisers already go beyond the requirements of Rule 17j-1, and funds may wish to integrate any codes of ethics that would be adopted in connection with the Sarbanes-Oxley requirements together with the pre-existing codes of ethics that they have under Rule 17j-1.
As the Commission noted in the proposal, a unit investment trust does not have a corporate-type management structure, and therefore would not be required to disclose whether it has a code of ethics because it has no officers. For unit investment trusts, the rule proposes to require disclosure with respect to codes of ethics of the trust's sponsor, depositor, trustee, or (under certain circumstances) its principal underwriter.
The Commission also proposed rules that would require a management investment company to disclose whether its audit committee includes at least one member who is a "financial expert." Specifically, proposed Form N-CSR would require a registered management investment company to disclose annually: (i) the number of financial experts serving on the investment company's audit committee; (ii) the names of the financial experts; (iii) whether the financial expert or experts are independent; and (iv) if the investment company does not have a financial expert serving on its audit committee, the fact that there is no financial expert and an explanation of why it has no financial expert.
The proposal defines "financial expert" to include individuals with certain attributes specified in the statute, and includes a number of factors that a board of directors must consider when determining whether an individual has all of the required attributes. We have specifically asked for comment on whether this definition should be modified in any way in the case of investment companies.
The Commission also proposed rules under Sarbanes-Oxley regarding prohibiting officers and directors of an issuer, and anyone acting under their direction, from taking action to fraudulently influence the auditor of an issuer's financial statements. The proposed rules would cover officers and directors of investment companies, as well as those of other entities, such as advisers, that may be in a position to fraudulently influence an auditor of an investment company.
Of particular interest to this audience should be the rule proposal approved by the Commission last week setting forth minimum standards of conduct for lawyers appearing and practicing before the Commission in the representation of issuers. Section 307 of the Sarbanes-Oxley Act provides that these standards must include a rule requiring an attorney to report "evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the company or any agent thereof" to the chief legal counsel or the chief executive officer of the company (or the equivalent); and, if they do not respond appropriately to the evidence, then the attorney must report the evidence to the audit committee, another committee of independent directors, or the full board of directors. The rule proposed by the Commission responds to Congress' mandate that the Commission adopt an effective "up the ladder" reporting system, recognizing that attorneys interact with the Commission on behalf of issuer clients in a number of ways and that such a mechanism protects investors by reaching attorney conduct that may threaten the Commission's processes and harm investors. At the same time, the proposed rule does not attempt to articulate a comprehensive set of standards regulating all aspects of the conduct of attorneys who appear and practice before the Commission. The Commission indicated that it does not intend to supplant state ethics laws unnecessarily, particularly in areas where the Commission lacks expertise. I would note that the proposed rule includes a broad definition of what constitutes the "representation of an issuer "and is defined so as to cover attorneys providing any legal services at the request of, or for the benefit of, an issuer. The rule is also intended to reflect the duty of an attorney retained by an issuer to report any evidence of misconduct which is material to the issuer, even if the misconduct does not directly involve the issuer or an employee of the issuer. Therefore, an attorney retained by an issuer who discovers evidence of misconduct by an agent of the issuer would be obliged to report that evidence to the issuer if the misconduct would have a material impact upon the issuer. For example, an attorney employed by an investment adviser who prepares or assists in preparing materials that the attorney has reason to believe will be submitted to or filed with the Commission by or on behalf of a registered investment company is representing the investment company before the Commission. If such an attorney discovers evidence of a material violation by an officer of the investment adviser that may relate to the investment company, the attorney would be obliged to report that evidence to the chief legal officer of the investment company. In effect, an attorney employed by the investment adviser representing the investment company before the Commission has joint clients. Frankness and candor between co-clients regarding matters of common interest normally preclude any expectations of confidentiality regarding communications with their attorney and therefore this reporting obligation does not do violence to the attorney-client privilege. We will be very interested in your comments on this proposal, and in particular, how the rule will apply to lawyers representing clients in the investment management area.
In each of the Sarbanes-Oxley rule proposals, the Commission has endeavored to apply the statutory requirements in a manner that carries forth the intent of Congress in enacting these provisions. We look forward to receiving your comments on the pending rule proposals.
As I noted earlier, we have also been devoting significant resources to implementing the requirements of the USA PATRIOT Act, which the President signed into law in October of last year. The provisions of the Act are intended to facilitate the prevention, detection, and prosecution of international money laundering and the financing of terrorism. The Act's requirements generally apply to all financial institutions including investment companies and insurance companies. The Treasury Department, with the assistance of the Commission and other federal financial regulators, has adopted, and proposed for adoption, rules designed to adapt the anti-money laundering program requirements to particular types of financial institutions. Mutual funds have been one major focus of these rules, in part, because mutual fund assets represent such a large percentage of the assets held by all financial institutions.
On April 29 of this year, Treasury, through its Financial Crimes Enforcement Network, aka FinCEN, issued an interim final rule requiring mutual funds to develop and implement anti-money laundering programs reasonably designed to prevent the funds from being used to launder money or finance terrorist activities.
The PATRIOT Act does, however, give institutions flexibility in tailoring their programs to fit their business activities, size, and location. Additionally, mutual funds are encouraged to adopt procedures for voluntarily filing Suspicious Activity Reports with FinCEN and for reporting suspected terrorist activities to FinCEN.
The Commission also proposed in a joint-rulemaking with the Treasury Department to require mutual funds to adopt procedures to verify the identities of their customers and to keep records related to their customer verification programs. The names of mutual fund customers would then be cross-checked with lists of known or suspected terrorists. The SEC and the Treasury issued a parallel proposal that would cover broker-dealers, while other financial institutions would be subject to similar requirements under rules proposed by the other federal financial regulatory agencies. The comment period for the proposed rule closed in September. We received a number of thoughtful comments, which generally concerned the scope and depth of the rule's requirements. We continue to work with Treasury to develop a final rule with the goal of having the customer ID program be an important step in efforts to deter the use of financial institutions for money laundering and financing of terrorist activities. As for implementation, Treasury announced on October 11 that financial institutions will not be required to comply with the customer ID rules, or those proposed under the Patriot Act (which had an October 25th deadline), until the final rules are issued and become effective. Treasury also noted that financial institutions will be allowed a "reasonable time" to comply with the final rules.
Up until this past September, FinCEN had deferred the anti-money laundering program requirements that would have applied to the insurance industry in order to provide Treasury with time to study the industry and to consider how anti-money laundering controls could best be applied to the industry. On September 26, Treasury, through FinCEN, issued a proposed rule to prescribe minimum standards for anti-money laundering programs for insurance companies. In its notice, FinCEN states that, in its view, the most significant money laundering risks in the insurance industry are found in life insurance and annuity products, because such products allow a customer to place large amounts of funds into the financial system and seamlessly transfer such funds to disguise their true origin. Therefore FinCEN has focused the proposed rule on insurance products with investment features as possessing the ability to store value and transfer that value to another person. If you question the need for regulation in this area, the preamble to the proposed rule describes in some detail ways in which narcotics money launderers have used life insurance products to launder funds effectively.
The proposed rule requires that each insurance company develop and implement an anti-money laundering program reasonably designed to prevent the insurance company from being used to facilitate money laundering or the financing of terrorist activities. The program must include minimum requirements similar to those for mutual fund anti-money laundering programs.
The FinCEN proposal does recognize that insurance companies frequently conduct their operations through agents and third party service providers and that the insurance company may delegate some elements of the compliance program to an agent or third party. However the insurance company remains fully responsible for the effectiveness of the program and for the availability of information and records.
I would encourage you to submit comments on this rulemaking proposal. Written comments are due to the Department of Treasury on or before November 25, 2002.
Just last month, FinCEN issued another notice of proposed rulemaking that would require insurance companies to report suspicious transactions to the Department of the Treasury. Again I would encourage you to submit comments on this rulemaking proposal. Written comments are due to the Department of Treasury on or before December 16.
Along with our implementation of Congressional directives, we have continued to pursue our mandate to protect investors in variable life products by requiring companies to provide clear and comprehensive disclosure. One big step in that direction has been the adoption of Form N-6 for the registration of variable life insurance policies.
The new Form N-6 focuses prospectus disclosure on essential information that will assist an investor in deciding whether to invest in a particular variable life insurance policy, including information about premiums, death benefits, cash values, surrenders, withdrawals, and loans. The new form minimizes prospectus disclosure about technical and legal matters and improves disclosure of fees and charges.
I view the N-6 as a significant step in the process of improving variable life insurance disclosure. However, marginal or poorly written disclosure will not be cured by simply importing it into the new form. Therefore, let me urge you to take this opportunity to craft the best disclosure possible, disclosure that as clearly as possible explains your product and the terms of your offering. We think the new form will prove to be a helpful vehicle for doing so, and we look forward to working with you over the next year in accomplishing this goal. We encourage you to seize this opportunity to make your disclosure documents understandable for investors.
Although the mandatory December 1, 2002 compliance date for the form has not yet arrived, several issuers have already filed amendments, as well as new registration statements on the new form. From what we have seen so far-and I am sure this will not surprise anyone-it seems that the greatest difficulty people are having with the form has been with the fee table.
In Form N-6, for the first time, variable life insurance prospectuses are required to include a fee table similar to those long required for both mutual funds and variable annuities. Although charges for variable life products are more complex than charges for these other types of investments, it is important that investors receive clear, understandable disclosure allowing them to compare fees and charges among different policies. The N-6 fee table requires that all charges, including rider charges, be disclosed, even though certain charges may apply only to a limited number of policyholders. Some commenters argued that if rider charges were included, policyholders would be overwhelmed by information that did not apply to them. In the adopting release for Form N-6, the Commission noted, however, that in recent years, insurers are increasingly offering "unbundled" variable insurance products, in which a basic policy is offered, and investors can pick and choose from a myriad of different riders to create a product that meets their individual needs. The Commission stated its belief that it is not feasible to distinguish between charges for optional features that ought to be included in the fee table because they are expected to be selected by most or a majority of investors, or by "typical" investors, and charges for optional features that are expected to be less popular and hence should be omitted from the fee table. The Commission did note that a registrant may readily ensure that disclosure of rider charges does not overwhelm disclosure of base contract charges by, for example, disclosing rider charges at the end of the second section of the fee table, under a caption that indicates that the charges are for optional features.
The new form also requires that the cost of insurance be presented as a range from the minimum to the maximum charge that may be imposed under a policy. In addition, issuers must include the cost of insurance charges that would be paid by a purchaser who is representative of actual or expected purchasers of the policy. As the Commission stated in the adopting release, we believe that fee table disclosure of the cost of insurance can serve as a flag to prospective investors that this is a significant charge which bears further investigation.
With regard to the treatment of underlying fund expenses, just yesterday, the Commission adopted amendments that revise the format of the fee table of Form N-4 to require disclosure of the range of expenses for all of the mutual funds offered through the separate account, rather than disclosure of the expenses of each fund, as was previously required. These amendments, along with some other technical amendments to the fee table, conform the treatment of fund expenses in Form N-4 to that in the new Form N-6 fee table.
The use of a range of expenses for all of the portfolio companies offered through the separate account will simplify the fee table for variable annuity contracts. As with variable life insurance policies, the number of investment options available through a typical variable annuity contract has expanded. In addition, insurers have increasingly offered variable annuity contracts with a variety of unbundled optional features, each of which usually has a separate charge. These trends have caused variable annuity fee tables to become increasingly complicated with the potential for overwhelming investors with information. Disclosure of the range of expenses for all of the portfolio companies offered through the separate account will streamline the N-4 fee table and enable investors to more easily understand relevant information about fees and charges.
Investors in variable annuity contracts will continue to have access to information about the fees and expenses of each portfolio company. In connection with the adoption of Form N-6, we amended Form N-1A to eliminate the exclusion from the fee table requirement for mutual funds that offer their shares exclusively to separate accounts. Because this exclusion has been eliminated, investors in variable annuity contracts will now have access to information about fees and expenses of each portfolio company in the prospectus for the portfolio company. The amendments to the fee table of Form N-4 require a statement referring investors to the portfolio company prospectuses for more detail concerning the portfolio company's fees and expenses.
Under the new rule, registrants have the option to continue to include disclosure of fees and expenses for each portfolio company in the fee table of Form N-4, in addition to the range of expenses for the company. This approach parallels the fee table approach of Form N-6 and provides registrants with the flexibility to include this detailed information when they determine that it would be helpful and not overwhelming to investors. This approach would be necessary for N-4 and N-6 prospectuses that become effective before the underlying funds amend their prospectuses to add fee tables on May 1 of next year.
I now would like to turn to an important Commission initiative aimed at increasing transparency in the investment management industry and encouraging adherence to fiduciary principles, two elements fundamental to investor confidence. In late September, in response to multiple rule-making petitions, the Commission proposed rules for proxy voting disclosure. The proposed rules would require mutual funds, closed-end funds, and managed separate accounts to disclose to investors their proxy voting policies and procedures and their actual proxy votes cast. The proposal is designed to enable shareholders to monitor their funds' involvement in the governance activities of portfolio companies.
Under the proposal, a fund would disclose its proxy voting policies and procedures in its registration statement, including the procedures it uses when a vote presents a conflict between shareholders' interests and those of the fund's investment adviser, principal underwriter, or its affiliates. Funds' proxy voting records would be filed with the Commission and would indicate whether a matter on which a fund was entitled to vote was proposed by the issuer or a security holder, whether and how the fund voted, and whether its vote was for or against management. If a fund makes a vote that is inconsistent with its policies, this fact would need to be disclosed in shareholder reports. Information on how shareholders may obtain a fund's voting information-through a toll-free number, on its website (if applicable), and on the Commission's website-would also need to be disclosed.
The proposal would also cover investment advisers who would be required to have written policies and procedures governing how they vote their clients' securities. The policies and procedures would need to be designed to ensure that the adviser votes proxies in its clients' best interests, and they must address material conflicts of interest between the adviser and its clients. Advisers would also be required to describe their voting policies to clients, provide a copy of them when requested, and inform clients how to obtain information from the adviser on how it voted their proxies. The proposal also requires advisers to keep records of their proxy votes.
As the Commission noted in the proposal, shedding light on fund proxy voting could illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders' best interests. The comment period for the proposed rules closes on December 6 of this year.
Let me turn now to a current rule proposal that I think is a significant development for the industry. In May of this year, the Commission proposed to amend rule 482 to increase funds' flexibility in advertising by eliminating the requirement that fund advertisements contain only information the substance of which is included in the statutory prospectus. This requirement has resulted in laundry lists and boilerplate statements cluttering fund prospectuses and statements of additional information. This has prevented funds from including timely information in their advertisements, such as information about current economic conditions that normally would not be included in a fund's prospectus. Accordingly, we hope that the proposed change, if adopted will make fund advertisements more informative and streamline fund prospectuses.
The fund advertising proposals also would require that fund advertisements that contain performance information provide additional information to give context to investors when reviewing this performance information. The Commission has proposed that all fund advertisements that contain performance information include the following:
The proposed amendments would also require funds that advertise performance to make available -- by a toll-free or collect telephone number -- returns that are current to the last day of the previous calendar month. Fund advertisements would be required to identify the telephone number and, if available, a Web site where an investor could obtain this information. Under existing rules, funds that advertise performance information typically include returns for 1-, 5-, and 10-year periods that are current to the last day of the most recent calendar quarter. Finally, these amendments would reemphasize that fund advertisements are subject to the antifraud provisions of the federal securities laws.
We also took the opportunity of this rule proposal to solicit comments on an issue regarding prospectus delivery requirements for variable insurance products. Rule 482 generally prohibits a fund advertisement from containing or being accompanied by an application to purchase fund shares. There is an exception in the rule that allows a variable product prospectus-which generally constitutes a rule 482 advertisement for underlying funds described in the prospectus-to include an application, even though the prospectuses for the underlying funds do not accompany the contract prospectus. Some have suggested that, in light of this exception, it should be permissible for a contract prospectus and application to be accompanied by other types of rule 482 advertisements for the underlying funds that are not part of the prospectus itself.
We think it would be useful to clarify the ambiguities in the scope of the insurance exception from the application prohibitions of rule 482 so that variable product issuers may operate with greater certainty. For this reason, we solicited comments on several specific questions related to this issue. We are in the process of reviewing your comments.
We understand that market timing activity continues to present problems for the efficient management of portfolios. Market timers can force portfolio managers to hold excess cash and sell holdings at inappropriate times, adversely impacting a fund's performance, increasing trading costs and harming long term investors. The tax-deferred status of variable products makes them susceptible to this activity. Insurance companies have been trying a number of methods to deter market timers such as limiting the number of transfers between subaccounts permitted to contract owners without charge, and offering classes of underlying funds that impose redemption fees for short-term investments. The Investment Company Institute requested that the SEC staff concur with their view that a fund may, consistent with Section 11(a) of the 1940 Act, offer its shareholders the opportunity to exchange their shares of a fund for the shares of another fund on a specified delayed basis. In other words, the exchange would be executed at a specified time after the day that the fund receives a shareholder's exchange order.
We recently responded to the ICI confirming the staff's view that a registered open-end investment company may, consistent with Section 11(a), make an exchange offer on a specified delayed basis, so long as the offer is fully and clearly disclosed in the fund's prospectus. Section 11(a) generally prohibits exchange offers at other than relative net asset value. Section 11(a), however, specifically provides for the determination of net asset value: 1) at the time of the receipt by the offeror of the acceptance of the offer or 2) at such later time as is specified in the offer.
Therefore, consistent with Section 11(a), we believe a fund could make an offer to exchange its shares for the shares of another fund on a specified delayed basis pursuant to which all exchange orders received before the fund calculates its net asset value on any business day, or after a specific disclosed time on any business day, would be executed at the relative net asset values of the funds calculated on the next business day.
Our letter does not specifically address the issue in the context of funds underlying variable insurance products. However, we would take the same approach for transfer policies clearly disclosed in the product prospectus-as well as the fund prospectus-under which transfer requests are effected on a specified delayed basis. We believe this should prove a helpful tool in your efforts to curb the disruption that may result from market timing activity.
I also wanted to briefly mention another Commission initiative concerning hedge funds. I know hedge funds are of interest to some of you, whose companies are considering the feasibility of offering an investment option in their insurance products involving hedge funds. We know that hedge funds today are being offered to broader segments of the investing public. At one time in the insurance products area, hedge fund investments were only made available through specially designed policies for wealthy individuals, but insurers are now making standardized variable products available with hedge funds as underlying investments to a broader investor base. In recent years there has been rapid growth in the United States and worldwide in the number of private unregistered investment funds, and in the amount of assets in these funds. The Commission is concerned about the implications flowing from the growth of private investment funds including the increasing potential for fraud. Just last week, the Commission charged a hedge fund manager with violating the anti-fraud provisions of the Advisers Act, alleging that the hedge fund manager reported net asset values and corresponding returns to fund investors that it knew or should have known were materially overstated.
Currently, most hedge funds are not registered as investment companies with the Commission. In many cases, their advisers are not registered as investment advisers with the Commission, and the funds do not register their securities offerings with the Commission. To gain a better understanding of the issues currently affecting these types of investment vehicles, the Commission commenced a formal fact-finding investigation in this area. We anticipate that the investigation will enhance the Commission's understanding of these vehicles and their operations. Ultimately our goal is to determine whether the present state of regulation or lack thereof is in the public interest. We are currently in the process of fact-finding and expect to have a comprehensive record to present to the Commission in the near future.
Finally, I would call your attention to the fact that our Office of Compliance Inspections and Examination ("OCIE") is making changes to the way in which it approaches the inspections of investment companies and investment advisers. Lori Richards, the head of OCIE, described this new approach in a speech given on October 30, 2002, which is available on the Commission's website. Lori noted that OCIE will employ a new risk-based approach to selecting registrants for inspection that will result in a different inspection frequency for firms with different risk profiles. She also noted that OCIE would be employing a substantially enhanced process for conducting inspections that places greater emphasis on an adviser's risk management and internal control processes. These changes will correlate both examination frequency and examination scope with risk. I encourage you to read Lori's speech so you can gain a better understanding of the new inspections approach employed by OCIE.
As I suggested when I began this talk, we at the Commission and you, as professionals working in the variable products industry, are facing an ever-changing marketplace. Many of the regulatory initiatives I have mentioned this morning are responses to these changes. I am confident that these developments are positive steps that will result in enhanced disclosure, transparency, and shareholder protection. Although we are busy, we are interested in your ideas, comments and concerns. I encourage you to submit comments on any pending rulemaking that may affect your operations. I encourage informal inquiries and discussions with our staff. We look forward to working with you, as we collectively seek sensible solutions to the new challenges we all face.
Thank you for listening and enjoy the rest of your conference.
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