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SEC Settles Enforcement Action with Morgan Keegan Directors Regarding Fair Valuation

In our April Update, we reported that the SEC had reached a tentative settlement agreement with former Morgan Keegan directors relating to charges that they failed to adequately oversee the fair valuation of securities in five Morgan Keegan funds that were heavily invested in securities backed by subprime mortgages. The six independent and two interested directors reached a settlement in principle with the SEC on March 27th, just days before the start of an administrative hearing on the matter. Details of the settlement were not known until the SEC announced a final settlement on June 13, 2013. The settled order finds that the directors caused the funds' violations of Rule 38a-1 under the Investment Company Act, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws. The directors were ordered to cease and desist from committing or causing any violations and any future violations of that rule. The directors consented to the entry of the settled order without admitting or denying any of the findings. Although no monetary penalties were imposed, an SEC enforcement action against individual directors is unusual and signals the importance that the SEC assigned to the matter.

"Our settlement sends a clear warning of our commitment to enforce the duty of mutual fund directors and trustees to closely oversee the process of valuing securities held by their funds," said George S. Canellos, Co-Director of the SEC's Division of Enforcement.

Under the securities laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available. In addition, fund directors must determine the methodologies to be used to fair value securities and must periodically reevaluate the appropriateness of those methodologies. The SEC took the opportunity to remind directors of its position that while directors may engage others to calculate fair values, they are ultimately responsible for valuations of portfolio securities, citing Accounting Series Release No. 118 (Dec. 23, 1970).

Sources: Former Mutual Fund Directors Agree to Settle Claims That They Failed to Properly Oversee Asset Valuation, SEC Press Release 2013-111 (June 13, 2013); In the Matter of J. Kenneth Alderman, CPA; Jack R. Blair; Albert C. Johnson, CPA; James Stillman; R. McFadden; Allen B. Morgan Jr.; W. Randall Pittman, CPA; Mary S. Stone, CPA; and Archie W. Willis III; Investment Company Act Release No. 30557 (June 13, 2013).

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 197


About this Author

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and reorganizations of mutual funds.

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.