SEC settles case with ex-directors of Morgan Keegan funds

Commission steps up efforts to hold mutual fund directors accountable for accurately priced assets

Mar 27, 2013 @ 3:57 pm

By Mark Schoeff Jr.

Morgan Keegan mutual funds legal
+ Zoom

The Securities and Exchange Commission has settled a case involving eight former directors of the Morgan Keegan & Co. Inc. mutual funds, but the agency's effort to put pressure on fund directors to accurately value assets is likely to continue.

“The parties have agreed in principle to a settlement on all major terms,” said a joint motion released by the SEC. “A stay is thus appropriate to afford the parties an opportunity to present the settlement offer to the commission for its consideration.”

In a civil enforcement action filed in December against eight former directors of five Morgan Keegan mutual funds, the agency alleged that the directors violated their responsibility to ensure accurate valuations of the assets in the funds, which totaled about $3.85 billion in 2007. Investors lost more than $1 billion when the funds, which contained below-investment-grade debt backed by subprime mortgages, collapsed during the financial crisis.

The hearing was widely anticipated throughout the fund industry. That's because it highlighted the SEC's recent focus on the role of mutual fund directors in looking out for the interests of fund shareholders — particularly when it comes to making sure a fund's holdings are properly valued.

“In the area of valuation, it's a wake-up call,” said Jay Baris, a partner and chairman of the investment management practice at Morrison & Foerster LLP. “The SEC is peering into the boardroom. This signals that not only are they going after fund directors, there are indications they will come after professionals who serve the directors, including accountants and lawyers.”

The Morgan Keegan case is likely an example of more to come.

“They've been looking for cases of egregious board behavior to send a message to the industry about what boards should be doing,” said Gregory Sheehan, a partner at Ropes & Gray LLC. “Valuation is a very high-priority area for the SEC. It's high risk.”

Norm Champ, director of the SEC Division of Investment Management, emphasized the agency's focus on mutual fund boards in a March 17 speech at an Investment Company Institute conference in Palm Desert, Calif.

“Fund directors serve as the eyes and ears of fund investors,” Mr. Champ said, according to his prepared text. “Directors even serve, in part, as the eyes and ears of regulators. Given the critical oversight role of fund directors, we need to ask some tough questions.”

The commission is trying to determine whether directors are being asked to do too much when they oversee multiple funds. It's also delving into whether fund directors “are equipped to ask tough questions” about fees paid to advisers and securities lending agents.

But the guidance for boards that the SEC laid out in its complaint against Morgan Keegan, and a related brief from former SEC Chairman Harvey Pitt, goes too far, according to Mr. Sheehan.

“You're really going to be facing a situation where trained economists and valuation experts have to sit on the boards,” he said. “That's a pretty scary vision.”

Cracking down on board directors could make recruiting for the positions difficult, according to Terry Reilly, who is of counsel at Montgomery McCracken Walker & Rhoads LLP.

“You don't want to chase away talented people,” Mr. Reilly said. “You don't want to create extreme liability.”

Mr. Baris said that it's unfair to judge a board's valuation of a security several years after the decision.

“As long as they are independent and diligent, they should not be judged after the fact with the benefit of 20/20 hindsight,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

Pershing's Crowley: The case for business transformation

Your practice is changing rapidly. What worked five years ago might not work for the next five years. Pershing's Jim Crowley has some solutions as your business evolves.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Labor's Alexander Acosta and SEC's Jay Clayton tell lawmakers they will work together on fiduciary rule

In separate appearances before Senate panels, the regulators stressed the cooperation that Republican legislators and opponents of the DOL fiduciary rule are demanding.

Brian Block denies cooking the books at Schorsch REIT

Former CFO claims everything he did was 'appropriate' and 'correct.'

Interns will take on several roles at advisory firms this summer

College students are helping with client prep, firm visioning and long-term projects, among other duties.

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print