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News September 18, 2006 Issue

SEC Brings Another Money Market Fund Case; Callable Bond Maturities Again the Culprit

For the second time in four months, the SEC has brought an enforcement action involving the allegedly incorrect calculation of callable bondsí maturity date for Rule 2a-7 purposes.

Do we detect a trend?

The SECís allegations in last weekís case against James Casselberry closely resemble those in its May 5 case against Unified Fund Services: The SEC alleged that Casselberry caused a money market fund for which he served as chairman, CEO, and portfolio manager to purchase bonds that were ineligible under Rule 2a-7. The bonds, which had remaining maturities of between three and a half and fourteen years, were callable at the discretion of the issuing government agency. They were not, however, callable at the option of the holder.

Rule 2a-7 effectively prohibits money market funds from buying any instrument with a remaining maturity of greater than 397 calendar days, unless the instrument has a maturity-shortening feature. A call option that is exercisable only at the option of the issuer does not qualify as a maturity-shortening feature under 2a-7.

The SEC also alleged that Casselberry aided and abetted his former advisory firmís violation of ICA Section 17(a)(3), which generally prohibits advisers from borrowing from their funds. Casselberry allegedly failed to timely pay invoices submitted by the fundís administrator under a fee waiver agreement.

To settle the case, Cassleberry agreed to a $25,000 civil penalty, a six-month bar from association with an advisory firm, and a concurrent twelve-month bar from the fund industry.