UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7552 / July 7, 1998 Securities Exchange Act of 1934 Release No. 40175 / July 7, 1998 Investment Company Act of 1940 Release No. 23304 / July 7, 1998 Investment Advisers Act of 1940 Release No. 1729 / July 7, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9461 ______________________________ : In the Matter of : : Fundamental Portfolio :ORDER MAKING FINDINGS, Advisors, Inc., Lance M. :IMPOSING REMEDIAL SANCTIONS, Brofman, Vincent J. :AND ISSUING CEASE-AND-DESIST Malanga,and :ORDER AGAINST VINCENT J. Fundamental Service :MALANGA Corporation, : : Respondents. : : ______________________________: I. On September 30, 1997, the Securities and Exchange Commission ("Commission") instituted public administrative proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 9(b) and (f) of the Investment Company Act of 1940 ("Investment Company Act"), and Sections 203(f) and (k) of the Investment Advisers Act of 1940 ("Advisers Act") against Vincent J. Malanga ("Malanga") to determine (a) whether Malanga violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the Investment Company Act; and (b) whether Malanga caused, aided, abetted, counseled, commanded induced or procured violations of Sections 206(1) and (2) of the Advisers Act. Malanga has submitted an Offer of Settlement ("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 in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which Malanga admits, Malanga consents to the entry of this Order Making Findings, Imposing Remedial Sanctions, and Issuing Cease-and-Desist Order Against Vincent J. Malanga ("Order"). II. Based on the Order and the Offer, the Commission finds that:[1] A.Malanga was, at all relevant times, president and 48% owner of Fundamental Portfolio Advisors, Inc. ("FPA"), a registered investment adviser, and chairman of the board and president of the Fundamental U.S. Government Strategic Income Fund (the "Fund"), a registered investment company. At all relevant times, FPA was the investment adviser to the Fund and four other funds (collectively, the "Fundamental Funds"). Malanga was also, at all relevant times, a registered principal and 43.7% owner of Fundamental Service Corporation, a registered broker-dealer that distributed and marketed the Fund. B.Malanga participated in marketing the Fund as a safe investment, offering relative stability of net asset value ("NAV"). According to the Fund's prospectus and sales materials, the Fund sought to limit interest rate risk, and thus to maximize stability of NAV, by limiting the Fund's "duration" to three years or less.[2] Contrary to the representations in the Fund's prospectus and sales materials, in the latter portion of 1993 and throughout 1994, the Fund had a heightened sensitivity to changes in interest rates, and its duration substantially exceeded three, due in part to its substantial investment in inverse floating collateralized mortgage obligations ("inverse floaters"). C.The Fund's chief portfolio strategist calculated the duration of the Fund and the instruments in the Fund's portfolio, including the inverse floaters. Contrary to the representations in the Fund's prospectus and sales literature, the chief portfolio strategist measured the "spread duration" of the inverse floaters. At least with respect to inverse floaters, spread duration is not a "yardstick to bond price volatility with respect to changes in [interest] rates" and substantially understates the interest rate sensitivity of those instruments.[3] D.Malanga knew, or recklessly disregarded, material facts that were misrepresented or not disclosed in the Fund's prospectus and sales literature, including the facts concerning the risks associated with the Fund's substantial investment in inverse floaters, the volatility and true duration of the Fund, and the chief portfolio strategist's failure to calculate the Fund's duration using a measure of duration that measured the instruments' sensitivity to changes in interest rates, in that: (1) Malanga was fully familiar with the representations in the Fund's prospectus and sales literature concerning the Fund's safety, relative stability of net asset value, and limited duration; (2) Malanga, who was responsible for determining whether the Fund's duration should be lengthened or shortened, conducted no meaningful oversight of the chief portfolio strategist's duration calculations, even though Malanga was aware of the prior Commission proceedings against the chief portfolio strategist; and (3) Malanga knew or recklessly disregarded that the Fund was not behaving in the manner that a fund with a duration of three or less should have behaved. E.From 1990 through at least December 1995, FPA had a soft dollar arrangement.[4] Some of the soft dollar payments went to an economic consulting firm run by a business associate of Malanga. Although questioned about possible soft dollar arrangements at several meetings of the board of the Fundamental Funds in 1994 and 1995, Malanga failed to disclose the soft dollar arrangement to the board. F.Based on Paragraphs A.-D. above, from in or about May 1993 through at least March 1995, Malanga willfully violated Section 17(a) of the Securities Act. G.Based on Paragraphs A.-D. above, from in or about May 1993 through at least March 1995, Malanga willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. H.Based on Paragraphs A.-D. above, from in or about May 1994 through at least March 1995, Malanga willfully violated Section 34(b) of the Investment Company Act. I.Based on Paragraphs A. and E. above, from at least October 1993 until at least May 1996, FPA willfully violated Sections 206(1) and (2) of the Advisers Act and Malanga willfully aided and abetted and caused the violations of Sections 206(1) and (2). III. In view of the foregoing, the Commission deems it appropriate in the public interest to impose the sanctions set forth in Malanga's Offer of Settlement. Accordingly, IT IS ORDERED THAT: A.Malanga cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 34(b) of the Investment Company Act, and Sections 206(1) and (2) of the Advisers Act; B.Malanga be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser, or investment company for a period of twelve months, effective on the second Monday after the date of this Order; C.Malanga be, and hereby is, barred from association in a supervisory capacity with any broker, dealer, municipal securities dealer, investment adviser, or investment company; provided that after a period of two years Malanga may reapply for association in a supervisory capacity to the appropriate self- regulatory organization, or if there is none, to the Commission; D.Within 21 days of the entry of this Order, Malanga pay a civil money penalty in the amount of $25,000 to the United States Treasury, pursuant to Section 21B of the Exchange Act, Section 9(d) of the Investment Company Act, and Section 203(i) of the Advisers Act. Such payment shall be (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the United States Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies Malanga as a respondent in these proceedings and states the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Henry Klehm III, Senior Associate Regional Director, Securities and Exchange Commission, Northeast Regional Office, Seven World Trade Center, New York, New York, 10048; and E.Malanga comply with his undertakings to: 1. Deliver an affidavit of compliance to Henry Klehm III, Senior Associate Regional Director, Securities and Exchange Commission, Northeast Regional Office, Seven World Trade Center, New York, New York, 10048, within ten (10) days following the suspension period stating that he has complied fully with the terms of the suspension; and 2. Reasonably cooperate with investigations, administrative proceedings, and litigation conducted by the Commission arising from or relating to the matters described in this Order. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings contained herein are made pursuant to Malanga's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. [2]: The term "duration" generally refers to the sensitivity of the value of a security or a portfolio of securities to changes in interest rates. The Fund's prospectus presented duration as a "yardstick to bond price volatility with respect to changes in [interest] rates." [3]: Prior to the events at issue, on two occasions, the chief portfolio strategist had, without admitting or denying the allegations, consented to the imposition of sanctions by the Commission for violations of the antifraud provisions in connection with two other mutual funds. [4]: The term "soft dollars" generally describes an arrangement whereby an investment adviser uses commission dollars generated by securities trades executed in advisory client accounts to pay for research, brokerage, or other products, services, or expenses. As used in this Order, the term includes soft dollar credits generated by syndicate designations.