Mutual Fund Directors Charged By SEC Over High Yield Funds

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The SEC announced today that it has charged eight mutual fund directors for failing to oversee the value of their securities during the 2007 financial crisis. The directors who oversaw five mutual funds, based in Memphis, Tennessee, completely ignored their asset pricing responsibilities under the federal securities laws.

Mutual Fund Directors Charged By SEC Over High Yield Funds

The mutual funds had invested in certain securities backed by subprime mortgages. The SEC alleges that all of the five funds overstated the value of securities during the subprime mortgage crisis of 2007. The five mutual funds were RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK High Income Fund, Morgan Keegan Select Fund, and RMK Advantage Income Fund. Morgan Keegan was earlier charged by the SEC for fraud, and the mutual fund later paid $200 million to settle that matter.

As per the federal securities laws, it is the responsibility of mutual fund directors to determine the fair value of securities, for which any market quotations aren’t available. However, these eight directors delegated this responsibility to a committee. The directors didn’t even give any meaningful guidance to the committee on how the fair value should be determined. Again, they made no attempts to learn how the committee was determining fair values. In fact, they had no idea of why a portfolio security was assigned a particular fair value.

Robert Khuzami, the head of the SEC’s Division of Enforcement, said that investors depend on directors to establish a clear process to value their investments. Otherwise, the investors’ ability to make informed decisions is handicapped, and they are left in dark about their investments. Had the directors realized their responsibilities, investors might have stood a better chance to preserve their hard earned money.

The eight directors charged by SEC are:

  • J. Kenneth Alderman of Birmingham, Ala.
  • Archie W. Willis III of Memphis
  • Jack R. Blair of Germantown, Tenn.
  • Mary S. Stone of Birmingham
  • Albert C. Johnson of Hoover, Ala.
  • W. Randall Pittman of Birmingham
  • James Stillman R. McFadden of Germantown
  • Allen B. Morgan Jr. of Memphis

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

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