SEC: Ex-Regions Morgan Keegan directors violated securities laws

By BenefitsPro

By Paula Aven Gladych

The Securities and Exchange Commission has issued a cease and desist order against eight former directors of five Regions Morgan Keegan open- and closed-end funds that were heavily invested in securities backed by subprime mortgages.

The SEC began the proceeding against the directors in December 2012, alleging they failed to satisfy their pricing responsibilities under the federal securities laws. Under these laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available.

They also must determine the methodologies to be used to fairly value securities and must periodically re-evaluate the appropriateness of the methodologies.

The settled order found that the eight directors failed to satisfy these responsibilities. They delegated their fair valuation responsibility to a valuation committee without providing adequate substantive guidance on how fair valuation determinations should be made.

The directors 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 limited information provided to the directors was particularly problematic because fair valued securities comprised a significant percentage of the funds' net asset values (NAVs) -- in most cases above 60 percent.

The settled order finds that the valuation committee to whom the directors delegated the fair valuation responsibilities did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the SEC found that the funds overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged Morgan Keegan and others, and the firms later agreed to pay $200 million to settle charges related to that conduct.

"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 Canellos, co-director of the SEC's Division of Enforcement.

The eight fund directors named are: J. Kenneth Alderman of Birmingham, Ala., Jack R. Blair of Germantown, Tenn., Albert C. Johnson of Hoover, Ala., James Stillman R. McFadden of Germantown, Allen B. Morgan Jr. of Memphis, W. Randall Pittman of Birmingham, Mary S. Stone of Birmingham, and Archie W. Willis III of Memphis.

The open- and closed-end 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.

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