The SEC announced
a settlement in an enforcement proceeding against eight former directors of
five Regions Morgan Keegan open- and closed-end funds that were heavily invested in securities backed
by subprime mortgages. The proceeding, which began in December 2012,
alleged that the directors failed to satisfy their pricing responsibilities
under the federal securities laws.
Under the securities laws, fund directors are
responsible for determining the fair value of portfolio securities for which
market quotations are not readily available. In addition, fund directors
must determine the methodologies to be used to fair value securities and must
periodically reevaluate the appropriateness of those methodologies. The
Commission made clear in Accounting Series Release No. 118 (Dec. 23, 1970) and In
the Matter of Seaboard Associates Inc., Investment Company Act Release No.
13890 (April 16, 1984) that while fund directors may engage others to assist
them to calculate fair values of these securities, they continue to be
ultimately responsible to determine fair value in good faith.
The settled order finds that the eight
directors failed to satisfy these responsibilities. Specifically, the directors
delegated their fair valuation responsibility to a valuation committee without
providing adequate substantive guidance on how fair valuation determinations
should be made. The directors then made no meaningful effort to learn how fair
values were being determined. They received only limited information about the
factors involved with the funds' fair value determinations, and obtained almost
no information explaining why particular fair values were assigned to portfolio
securities. The limited information provided to the directors was particularly
problematic because fair valued securities comprised a significant percentage of
the funds' net asset values (NAVs) - in most cases above 60 percent.
The settled order finds that the valuation
committee to whom the directors delegated the fair valuation responsibilities did not
utilize reasonable procedures and often allowed the portfolio manager to
arbitrarily set values. As a result, the settled order finds that the funds
overstated the value of their securities as the housing market was on the brink
of financial crisis in 2007. The SEC and other regulators previously
charged Morgan Keegan and others, and the firms later agreed to pay $200
million to settle charges related to that conduct.
For more information regarding SEC enforcement actions and the defense of those accused, contact Mark Astarita at Sallah Astarita & Cox, LLC. For more information on this particular case, seeit Former Mutual Fund Directors Agree to Settle Claims That They Failed to Properly Oversee Asset Valuation.
