SEC Brings Enforcement Action Against Mutual Fund Directors For Alleged Failures in Oversight of Valuation Committee


On December 10, 2012, the SEC filed an order instituting enforcement proceedings (the “OIP”) against both the interested and the independent directors of five registered investment companies advised by Morgan Asset Management, Inc. (the “Adviser”), alleging that the directors failed to properly carry out their duties during several months in 2007 with respect to overseeing the determination of the “fair value” of certain structured product securities owned by four closed-end funds and three series of an open-end investment company (the “Funds”).

The OIP represents a rare instance in which the SEC has instituted proceedings against fund directors and comes nearly 18 months after the Adviser settled a separate SEC enforcement proceeding on the same underlying facts. The OIP alleges that the directors delegated their asset-pricing responsibilities to the Adviser without giving adequate guidance on how the valuations should be made or ascertaining how the values were determined. Although it represents only the beginning of a formal fact-finding and litigation process, the OIP raises practical questions regarding how boards of directors fulfill their responsibilities with respect to valuation.

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