More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Securities and Exchange Commission on Wednesday charged Morgan Stanley Investment Management with violating securities laws in a fee arrangement that repeatedly charged a fund and its investors for advisory services they weren’t actually receiving from a third party.
MSIM agreed to pay more than $3.3 million to settle the SEC’s charges. “We want to take the advisory fee setting process out of the shadows by scrutinizing the role of investment advisors and fund board members in vetting fee arrangements with registered funds,” Robert Khuzami, director of the SEC's Enforcement Division, said.
The Division of Enforcement's Asset Management Unit is currently "inquiring into the investment advisory contract renewal process and fee arrangements in the fund industry,” said Khuzami, in announcing the action against Morgan Stanley.
The SEC’s investigation found that MSIM–the primary investment advisor to The Malaysia Fund–represented to investors and the fund’s board of directors that it contracted a Malaysian-based sub-advisor to provide advice, research and assistance to MSIM for the benefit of the fund, which invests in equity securities of Malaysian companies. However, the SEC say, "the sub-advisor did not provide these purported advisory services, yet the fund’s board annually renewed the contract based on MSIM’s representations for more than a decade at a total cost of $1.845 million to investors."
According to the SEC’s order, MSIM arranged The Malaysia Fund’s sub-advisory agreement with a subsidiary of AM Bank Group, one of the largest banking groups in Malaysia. "Despite the research and advisory agreement stating that the AM Bank Group subsidiary (AMMB) would provide MSIM with 'investment advice, research and assistance, as [MSIM] shall from time to time reasonably request," the SEC says it found that AMMB merely provided two monthly reports based on publicly available information that MSIM neither requested nor used in its management of the fund.
Furthermore, the SEC said, "MSIM’s oversight and involvement with AMMB during the relevant time period were wholly inadequate. MSIM had no written procedures specifically governing its oversight of sub-advisers, and did not have a procedure in place for reviewing work done by AMMB."