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.”