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SEC Resolves Fee Case

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The U.S. Securities and Exchange Commission has negotiated a settlement with an insurer-owned money manager over fund fee concerns and fee disclosure concerns.

The settlement resolves an SEC proceeding involving New York Life Investment Management L.L.C., a subsidiary of New York Life Insurance Company, New York.

NYLIM has agreed to pay a total of about $6.1 million into a settlement fund in connection with the settlement, SEC officials say.

“We are pleased that, with this settlement, the SEC’s inquiry into this matter has been resolved,” NYLIM representative John Puccio says.

The SEC began the proceedings in response to allegations of management-fee problems at NYLIM’s MainStay Equity Index Fund.

NYLIM told investors that an affiliate would make up the difference if, 10 years after an investor bought an Equity Index Fund share, the sum of the tenth-year net asset value and all dividends and distributions paid on the share was lower than the original purchase price.

NYLIM did not tell investors it was charging them for the guarantee, SEC officials allege.

In 2001, New York Life Insurance Company began to analyze exposure associated with the guarantee, and it closed the Equity Index Fund to new investors Jan. 1, 2002, SEC officials report.

NYLIM set aside $2 million in reserves for the fund guarantee in 2001, and $11.9 million in fund guarantee reserves in 2003, officials report.

When NYLIM was managing the fund from early 2002 through June 30, 2004, it charged management fees that were higher the management fees charged by managers of most similar funds analyzed, and it told the fund trustees that they should consider the value of the fund guarantee when assessing the management fees, SEC officials allege.

The NYLIM managers did not give the trustees enough information about the costs associated with the guarantee, officials allege.

NYLIM also was sending the SEC prospectuses, annual reports and registration statements showing that there was no charge to the fund for the guarantee, officials allege.

In 2003, outside consultants told the fund board that the management fees were high and that the guarantee was of limited value, officials allege.

“The report also questioned if the Guarantee had any cost associated with it at all ‘given how unusual it would be for the S&P 500 to lose money over such a long period (and the guarantee is good only on one specific day, the 10-year anniversary of the investor’s purchase date) . . . and [n]ow that the fund is closed to new investors, it would seem the liability for the guarantee would be shrinking,” SEC officials allege.

During the period covered by the proceedings, NYLIM management fees for the fund were about $3.95 million higher than they would be if fees had been set at the peer-group median, officials allege.

In addition to $3.95 million in “disgorgement,” NYLIM will be paying the settlement fund $1.35 million in interest and an $800,000 civil penalty, officials say.

Puccio says NYLIM promptly responded to SEC concerns about the fund fees when SEC raised questions about the matter in 2004.

NYLIM revised the prospectus disclosure and then capped fund expenses and management fees, Puccio says.

Puccio adds that the guarantee has turned out to have value for eligible investors after all.

As a result of the market decline that started in 2008, fund shareholders have received about $8.9 million in guarantee-related payments, Puccio says.

“The guarantee payments made by NYLIFE LLC, an affiliate of New York Life Investments, are not related to the settlement,” Puccio says. “We will continue to honor that guarantee for our investors in the fund.”


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