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Week In Review

IRS Probes 401(k) Compliance

The Internal Revenue Service has begun mailing out questionnaires to 401(k) plan sponsors to assess compliance with retirement plan regulations. The IRS random sample is going to 1,200 401(k) plan sponsors that filed a Form 5500 for the 2007 plan year. Plan sponsors who receive a letter will complete the questionnaire by accessing a special website.

The questionnaire categories are: demographics; 401(k) plan participation; employer and employee contributions; top-heavy and nondiscrimination rules; distributions and plan loans; other plan operations; automatic contribution arrangements; designated Roth features, IRS voluntary compliance programs; and overall plan administration

The IRS will then issue a report summarizing the results and identifying areas where additional education, guidance, and outreach is needed-as well as how IRS enforcement can address or avoid non-compliance in 401(k) plans. The IRS emphasized that the questionnaire is a compliance check, not an audit or investigation. Nonetheless, failure to complete the questionnaire will result in further enforcement action.

SEC Proposes Consolidated Audit Trail for SROs

The Securities and Exchange Commission has proposed a new rule requiring self-regulatory organizations (SROs) to create a consolidated audit trail that would greatly improve regulators' ability to track trading information.

"If adopted, this consolidated audit trail would, for the first time ever, allow the SEC and other market regulators to track trade data across multiple markets, products and participants in real time," said SEC Chairman Mary Schapiro. "It would allow us to rapidly reconstruct trading activity and quickly analyze both suspicious trading behavior and unusual market events."

Currently there is no single database of readily accessible data for orders and executions. The SEC said investigators tracking suspicious market activity must obtain and merge enormous amounts of data from a range of different markets and market participants.

"One of the challenges we face in recreating the events of May 6 is the reality that technologies used for market oversight and surveillance have not kept pace with the technology and trading patterns of the rapidly evolving markets," Schapiro said recently before the Senate Banking Committee. "A consolidated audit trail would be invaluable to enhance the ability to detect and monitor aberrant and illegal activity across multiple markets."

SEC Warns of Stock Scams Related to Gulf Oil Spill

The SEC and FINRA are warning investors to beware of stock scams that promise easy profits from cleanup efforts related to the catastrophic BP oil spill in the Gulf of Mexico. They noted that while some of the companies touting their role in the cleanup may be legitimate, others could be bogus operations that are only looking to clean out unsuspecting investors.

In a recent action, on May 25, the SEC suspended trading in shares of ACT Clean Technologies Inc., of Huntington Beach, Calif. The SEC took this action because of questions about the accuracy and adequacy of publicly disseminated information concerning, among other things: British Petroleum's purported expression of interest in using a so-called oil fluidizer technology purportedly licensed to ACT's wholly-owned subsidiary for use in cleanup operations in the Gulf of Mexico; and the purported results of field tests finding that the oil fluidizers are effective for use in cleanup efforts in the Gulf of Mexico.

The SEC and FINRA noted that some companies may issue press releases, or send unsolicited faxes or spam emails that might include:

* Claims to have products or technologies that are effective in remediating oil spills or restoring the eco-system

* Mention of contracts or expected contracts with BP, formerly British Petroleum, that will aid the cleanup effort

* Claims that the company is providing technical assistance or expertise to BP or to U.S. government agencies such as the Coast Guard or the Environmental Protection Agency

* Predictions of rapid, exponential sales growth

* Pressure to invest immediately without proper explanation

Funds Bleed $16.6 Billion

Investors pulled $16.6 billion from long-term mutual funds in the week ended May 26, the Investment Company Institute said Wednesday. It was the second week of outflows since mid-May, reversing the previous 57 straight weeks of inflows. Long-term funds lost $9.9 billion in the week ended May 12 and managed to take in $4.3 billion the following week ended May 19.

Industry insiders had heralded the strong inflows as a sign of continued investor trust in the markets, even though the lion's share of the money over the past year poured into bond funds and international equity funds.

In the latest week, that trend continued, with bond funds reaping $2.879 billion of new assets, with $2.420 of that into taxable bond funds and $459 million into municipals.

Those inflows offset the $17.387 billion that investors withdrew from equity funds. What was notable in the latest week, however, were the outflows from foreign stock funds, which were hit with $3.945 billion in redemptions. Investors also redeemed $13.442 from domestic stock funds.