The SEC charged eight former members of the boards of directors (“Directors”) overseeing mutual funds for violating their asset pricing responsibilities under the 1940 Act. The funds are RMK High Income Fund, Inc., RMK Multi-Sector High Income Fund, Inc., RMK Strategic Income Fund, Inc., RMK Advantage Income Fund, Inc. and (v) Morgan Keegan Select Fund, Inc. (the “Funds”). During the relevant period, each Fund had a board of directors that consisted of two interested directors and six independent directors. Morgan Asset Management, Inc. (“Adviser”) is the investment adviser to the Funds.
The administrative action is related to prior administrative actions against the Funds, which had invested in some securities backed by subprime mortgages. The Adviser was found by the SEC and other regulators to have fraudulently overstated the value of their securities as the housing market, which was on the brink of financial crisis in 2007.
The SEC stated that the Directors, like all mutual fund directors, were responsible for determining the fair value of Fund securities for which market quotations are not readily available. According to the SEC, the eight directors delegated their fair valuation responsibility to a valuation committee without providing meaningful 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.
Click http://www.sec.gov/litigation/admin/2012/ic-30300.pdf to access the SEC’s administrative action.