- The Custody Rule and its Ramifications When an RIA takes custody of a client’s funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The Securities and Exchange Commission has reached a settlement with the eight former independent directors of the Regions Morgan Keegan Funds who were charged by the SEC with overstating the value of their securities as the housing market was collapsing in 2007.
The SEC filed the charges in early December and the directors, in turn, filed an administrative proceeding against the SEC the same day, as they had vowed to “vigorously” fight the charges.
However, on Wednesday an administrative proceeding was issued asking for a stay for the hearing set for April 2 as a settlement in principle has been reached between the SEC’s enforcement division and the respondents. “The parties have agreed in principle to a settlement on all major terms,” stated a joint motion released by the SEC.
The eight directors oversaw five funds, which were invested in some securities backed by subprime mortgages. The mutual 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.
The SEC’s action in December followed a related $200 million settlement with Morgan Keegan, a subsidiary of Raymond James Financial, last year and sanctions against two employees in 2010.
As the SEC explained in its December order, “fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available,” but the eight directors violated this securities law by delegating “their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made.”
The fund directors, the SEC said, “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 SEC’s order goes on to say that these failures were “particularly egregious” given that fair valued securities made up the majority–in most cases upwards of 60%–of the funds’ net asset values.
Steve Crimmins, one of the two attorneys with K&L Gates in Washington who defended six of the independent directors, told AdvisorOne in an interview in December that the SEC has failed for too long to provide guidance on fair valuation, which has been a “notoriously gray area.”
The attorneys representing the eight directors issued a statement at the time saying that “more than five years after the events concerned, the SEC staff now seeks to pursue administrative charges against a group of independent directors alleging that they unintentionally caused regulatory violations related to portfolio valuation.” However, the attorneys wrote, the “SEC has chosen to ignore a host of facts and circumstances which demonstrate that these directors at all times acted diligently and in good faith during the unprecedented market turmoil of 2007.”
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Read Vow to Fight SEC Charges From Ex-Morgan Keegan Fund Directors on AdvisorOne.
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