FORM 10-K/A GAMCO Investors, Inc. - Gabelli

Investments by GBL on behalf of our clients often represent a significant equity ownership position in an issuer's class of stock. As of December 31, 2006, we had five percent or
more beneficial ownership with respect to approximately 110 equity securities. This activity raises frequent regulatory and legal issues regarding our aggregate beneficial ownership
level with respect to portfolio securities, including issues relating to issuers' shareholder rights plans or “poison pills,” state gaming laws and regulations, federal communications laws
and regulations, public utility holding company laws and regulations, federal proxy rules governing shareholder communications and federal laws and regulations regarding the
reporting of beneficial ownership positions. Our failure to comply with these requirements could have a material adverse effect on us.
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial transparency laws and mandates
the implementation of various new regulations applicable to broker-dealers, mutual funds and other financial services companies, including standards for verifying client identification
at account opening, and obligations to monitor client transactions and report suspicious activities. Anti-money-laundering laws outside of the U.S. contain some similar
provisions. Our failure to comply with these requirements could have a material adverse effect on us.
We and certain of our affiliates are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. In particular, we are subject to requirements in
numerous jurisdictions regarding reporting of beneficial ownership positions in securities issued by companies whose securities are publicly-traded in those countries. In addition,
GAMCO is registered as an international advisor, investment counsel and portfolio manager with the Ontario Securities Commission in Canada in order to market our services to
prospective clients who reside in Ontario. Several of our Investment Partnerships are organized under the laws of foreign jurisdictions. In connection with our opening of an office in
London and our plans to market certain products in Europe, we are required to comply with the laws of the United Kingdom and other European countries regarding these
activities. Our subsidiary, GAMCO Asset Management (UK) Limited, is regulated by the Financial Services Authority. In connection with our registration in the United Kingdom,
we have minimum capital requirements that have been consistently met or exceeded.
Recent regulatory developments
On September 3, 2003, the New York Attorney General’s office (“NYAG”) announced that it had found evidence of widespread improper trading involving mutual fund
shares. These transactions included the “late trading” of mutual fund shares after the 4:00 p.m. pricing cutoff and “time zone arbitrage” of mutual fund shares designed to exploit
pricing inefficiencies. Since the NYAG’s announcement, the NASD, the SEC, the NYAG and officials of other states have been conducting inquiries into and bringing enforcement
actions related to trading abuses in mutual fund shares. We have received information requests and subpoenas from the SEC and the NYAG in connection with their inquiries and
have been complying with these requests for documents and testimony. We implemented additional compliance policies and procedures in response to recent industry initiatives and
an internal review of our mutual fund practices and procedures in a variety of areas. A special committee of all of our independent directors was also formed to review various
issues involving mutual fund share transactions and was assisted by independent counsel.
As part of our review, hundreds of documents were examined and approximately fifteen individuals were interviewed. We have found no evidence that any employee participated
in or facilitated any “late trading”. We also have found no evidence of any improper trading in our mutual funds by our investment professionals or senior executives. As we
previously reported, we did find that in August of 2002, we banned an account, which had been engaging in frequent trading in our Global Growth Fund (the prospectus of which
did not impose limits on frequent trading) and which had made a small investment in one of our hedge funds, from further transactions with our firm. Certain other investors had been
banned prior to that. We also found that certain discussions took place in 2002 and 2003 between GBL’s staff and personnel of an investment advisor regarding possible frequent
trading in certain Gabelli domestic equity funds. In June 2006, we began discussions with the SEC staff for a potential resolution of their inquiry. As a result of these discussions,
GBL recorded a reserve of approximately $12 million in the second quarter of 2006. In February 2007, one of our advisory subsidiaries made an offer of settlement to the SEC
staff for communication to the Commission for its consideration to resolve this matter. This offer of settlement is subject to final agreement regarding the specific language of the
SEC’s administrative order and other settlement documents. As a result of these developments, we increased our reserves as of the fourth quarter of 2006 by $3 million. Since
these discussions are ongoing, we cannot determine at this time whether they will ultimately result in a settlement of this matter, whether our reserves will be sufficient to cover any
payments by GBL related to such a settlement, or whether and to what extent insurance may cover such payments.
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