Security - Check Permissions

MFDF - Mutual Fund Directors Forum - SEC Charges Independent Directors With Failure to Oversee Asset Valuation

Member Login



Request an account

Sample Banner 2

SEC Charges Independent Directors With Failure to Oversee Asset Valuation

Yesterday, the SEC announced charges against eight former independent directors of the Regions Morgan Keegan Funds for failing to meet their responsibilities to oversee the valuation of fund assets.  According to the SEC order:

“The Directors did not specify a fair valuation methodology pursuant to which the securities were to be fair valued. Nor did they continuously review the appropriateness of the method to be used in valuing each issue of security in the company’s portfolio. Instead, the Directors delegated their responsibility to determine fair value to a valuation committee without providing any meaningful substantive guidance on how those determinations should be made. In addition, they made no meaningful effort to learn how fair values were actually being determined. They received at best only limited information on the factors considered in making fair value determinations and almost no information explaining why particular fair values were assigned to portfolio securities.”

A statement released on behalf of the independent directors emphatically denied the allegations against them, stating:

“[T]he 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. For example, the SEC complaint fails to note that the SEC itself specifically determined in its 2011 enforcement case against Morgan Asset Management that these same directors were defrauded by fund management, who concealed improper valuation practices from them. . . . Moreover, at the very time in 2007 that the SEC contends these directors should have known that valuation procedures were deficient, the directors were advised by experienced independent auditors from a major accounting firm that the funds’ valuation procedures were reasonable and appropriate, and that the process was working properly and producing correct fair valuations. Similar assurances were received from the funds’ Chief Compliance Officer, and a 2005 SEC staff exam had produced no adverse comments on the fair valuation procedure or process. The current SEC action rejects the ability of directors to take any comfort from such experts or from the absence of any ‘red flags’ concerning the fair valuation process.”

The SEC order can be found here.

The statement on behalf of the independent directors is attached to this post.