An Analysis of Fair Valuation in the Context of the SEC's Enforcement Action Against the Morgan Keegan Fund Directors
Background The SEC's action against the Morgan Keegan fund directors was the last in a series of actions brought by the SEC, the Financial Industry Regulatory Authority (FINRA), and state regulators in connection with Morgan Keegan's overvaluation of subprime, mortgage-backed securities in...
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Published in: | The Investment Lawyer 2018-06, Vol.25 (6), p.1-7 |
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Main Authors: | , |
Format: | Article |
Language: | English |
Subjects: | |
Online Access: | Get full text |
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Summary: | Background The SEC's action against the Morgan Keegan fund directors was the last in a series of actions brought by the SEC, the Financial Industry Regulatory Authority (FINRA), and state regulators in connection with Morgan Keegan's overvaluation of subprime, mortgage-backed securities in five funds managed by Morgan Asset Management from January to July 2007.2 In the SEC's settled order against Morgan Keegan, Morgan Keegan Asset Management, its portfolio manager, and controller, the SEC found that many of the securities underlying the subprime mortgages lacked readily available market quotations, requiring pricing by fair value methods.3 The SEC also found that Morgan Keegan had failed to employ reasonable pricing procedures, did not calculate accurate net asset values (NAV), published inaccurate daily NAVs, and sold shares to investors based on inflated prices.4 SEC Action Against Morgan Keegan Fund Directors In 2012, the SEC issued an order instituting proceedings (OIP) against the Morgan Keegan fund directors for failing to comply with their valuation responsibilities under the Investment Company Act of 1940.5 In the OIP, the Division of Enforcement alleged that the directors' failures had caused the funds to violate three provisions of the federal securities laws-Rules 22c-1, 30a-3(a), and 38a-1 under the Investment Company Act-and sought monetary penalties and a cease-and-desist order.6 The SEC's settled order7 included a finding of just one violation by the fund directors-causing the funds to violate Rule 38a-1 under the Investment Company Act, which requires funds to adopt and implement policies and procedures reasonably designed to prevent violations of the federal securities laws.8 The SEC ordered the directors to cease and desist from any violations or any future violations of Rule 38a-1.9 No monetary penalties were imposed. Section 2(a)(41)(B) of the Investment Company Act defines "value" for registered investment companies (1) "with respect to securities for which market quotations are readily available" to mean "the market value of such securities" and (2) "with respect to other securities and assets, fair value as determined in good faith by the board of directors" (Emphasis added.) 12 Prior SEC Guidance In 1970, the SEC issued guidance on the fair valuation of securities by directors of registered investment companies.13 ASR 118 provides guidance on how fund directors may meet this statutory duty. More simply put, ASR 118 provides that fun |
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ISSN: | 1075-4512 |