December 16, 2003

A Little Something, Something for

For TheCorporateCounsel members, we finally got our hands on a nice sample D&O questionnaire for Nasdaq companies – fully updated for the new governance listing standards and in a Word file.

Still working on one for NYSE companies – let me know if you see something. [personal anecdote – Saw Simon & Garfunkel last night. Truly amazing; Paul should run for President. Coincidently, I worked for Senator Paul Simon in the ’70s as an intern (back when he was a Rep) – he was the most noble politician I have come across. Condolences to his family.]

SEC Goes After Independent Directors

Last Thursday, the SEC filed additional civil fraud charges in its long-running investigation of the Heartland Group high yield bond funds. Although this case is perhaps most noteworthy because of its analysis and response to mutual fund mispricings and bad acts by an independent pricing service, the SEC’s action does include meaningful relief under the ’33 Act as well.

The SEC obtained settled cease-and-desist orders against four independent directors of this registered investment company for violations of the antifraud provisions of the ’33 Act (in addition to violations of the fund pricing provisions of the ’40 Act). The funds’ prospectus expressly stated that the directors would monitor and assure the liquidity of the funds’ bonds. The directors failed to do this adequately and accepted the characterization of that failure as a violation of the antifraud provisions of the 1933 Act. More interestingly, they also agreed that their failure to participate meaningfully in the valuation of the Funds was a violation of the antifraud provisions of the ’33 Act – and not just of the ’40 Act.

The SEC’s actions against the directors came despite the fact that the independent directors had been lied to by the Funds’ advisor, had hired experts to assist them in performing their duties and had engaged in subsequent remedial actions once the Funds’ problems came to their attention.