The SEC is scrutinizing mutual funds’ fee arrangements, looking for instances of gouging, and finding plenty of them. Morgan Stanley just agreed to pay $3.3 million for its role facilitating over $1.8 million in payments by a mutual fund to a third party for services the fund did not receive (“Morgan Stanley Settles SEC Case,” Wall Street Journal). Many more such cases are expected in coming months.
According to the SEC: Morgan Stanley Investment Management (“Morgan Stanley IM”) was the primary investment advisor to the Malaysia Fund, Inc. ? a closed-end fund. The Malaysia fund can be bought by Morgan Stanley clients. Morgan Stanley IM contracted with an entity called “AMMB Consultant Sendirian Berhad” (“AMMB”) to provide advice, research and assistance as a subadvisor to Morgan Stanley IM. AMMB did not provide the contacted-for services. The most AMMB ever did was provide two reports containing publicly available information, which were never requested or used by Morgan Stanley IM. Despite this, Morgan Stanley IM recommended that the fund’s board renew the contract every year for a decade, and the board did so. That costs fund investors $1.845 million.
In addition, Morgan Stanley IM’s “oversight and involvement with AMMB during the relevant time period were wholly inadequate,” said the SEC, adding: Morgan Stanley IM had “no written procedures specifically governing its oversight of subadvisers, and did not have a procedure in place for reviewing work done by AMMB.”
Morgan Stanley IM agreed to repay the fund (not investors) $1.845 million plus pay a $1.5 million penalty to the SEC. Morgan Stanley further agreed to “cease and desist” from any future violations of investment advisor regulations.
Judges have criticized SEC settlements that they have been asked to approve because the SEC failed to charge for violations of previous “crease and desist” orders involving the same or similar securities laws. Judges have also criticized the low settlement amounts and the SEC’s failure to hold senior corporate executives accountable.
Page Perry is an Atlanta-based law firm with over 170 years collective experience representing investors in securities arbitration and litigation. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.