More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The eight former independent directors of the Regions Morgan Keegan Funds who were charged by the SEC on Monday with overstating the value of their securities as the housing market was collapsing in 2007 say they will “vigorously” contest the charges.
The directors, who filed an administrative proceeding against the SEC the same day, oversaw five funds, which were invested in some securities backed by subprime mortgages. The SEC’s action, filed in administrative court, follows a related $200 million settlement with Morgan Keegan, a subsidiary of Raymond James Financial Inc., last year and sanctions against two employees in 2010.
As the SEC explained in its order, “fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available,” but the eight directors violated this securities law by delegating “their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made.”
The fund directors, the SEC said, “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 SEC’s order goes on to say that these failures were “particularly egregious” given that fair valued securities made up the majority–in most cases upwards of 60%–of the funds’ net asset values.
The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund and Morgan Keegan Select Fund.
Robert Khuzami, director of the SEC’s Division of Enforcement, noted in a statement announcing the charges that “investors rely on board members to establish an accurate process for valuing their mutual fund investments.” Otherwise, he said, “they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions. Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned nest assets.”
While Khuzami went on to say that the Enforcement Division’s Asset Management Unit continues to “prioritize asset valuation investigations,” Steve Crimmins, one of the two attorneys with K&L Gates in Washington who’s defending six of the independent directors, told AdvisorOne in an interview on Wednesday that the SEC has failed for too long to provide guidance on fair valuation, which has been a “notoriously gray area.”
K&L Gates attorneys Crimmins, who served for eight years as the SEC's Deputy Chief Litigation Counsel, and Jeffrey Maletta issued a statement on Monday, which said the former directors “emphatically deny” the allegations against them, and that they were confident they would “ultimately be vindicated.”
The SEC action “can only be explained as a misguided attempt to retroactively regulate by enforcement in an area in which the SEC has been unwilling or unable to provide meaningful guidance through the normal regulatory process,” the K&L Gates attorneys wrote in their statement.
“More than 5 years after the events concerned, the SEC staff now seeks to pursue administrative charges against a group of independent directors alleging that they unintentionally caused regulatory violations related to portfolio valuation,” the attorneys wrote. “However, the SEC has chosen to ignore a host of facts and circumstances which demonstrate that these directors at all times acted diligently and in good faith during the unprecedented market turmoil of 2007.”
The eight fund directors named in the SEC enforcement action are:
- J. Kenneth Alderman of Birmingham, Ala.
- Jack R. Blair of Germantown, Tenn.
- Albert C. Johnson of Hoover, Ala.
- James Stillman R. McFadden of Germantown
- Allen B. Morgan Jr. of Memphis
- W. Randall Pittman of Birmingham
- Mary S. Stone of Birmingham
- Archie W. Willis III of Memphis
Susan Ferris Wyderko, president and CEO of The Mutual Fund Directors Forum, said in an email message to AdvisorOne that while she had “no special knowledge of the facts” in this case, fund “directors have important statutory duties with respect to the valuation of fund securities.”
She cited the Forum’s June 2012 report on Board Oversight of Valuation, which states that “[b]ecause of the importance of valuation coupled with the general lack of day-to-day participation, boards strive to find the appropriate balance between delegation and participation in the valuation process.” The report adds, “[d]ue to the constantly evolving nature of valuation issues, advisers and boards should work together to build a process that continues to be actively monitored and effective.”