The Securities and Exchange Commission says Morgan Stanley Investment Management (MSIM) set up a fee arrangement that charged a fund (as well as its investors) for services that they weren’t actually getting from another party. MSIM has agreed to pay over $3.3M to settle the charges that it violated securities laws.
As the main investment adviser to The Malaysia Fund, MSIM told the fund’s board of directors and investors that a sub-adviser, an AM Bank Group subsidiary, had been contracted to provide research, advice, and support even though according to the SEC, the sub-adviser did not actually provide these services. Rather, AMMB issued just two monthly reports stemming from information that was available to the public. MSIM did not ask for the reports nor did it use the data provided to manage the fund. Still, the fund’s board renewed the contract with this sub-adviser each year from 1996 to 2007 and this cost investors $1.845 million.
The SEC contends that MSIM failed in its obligation to let board members know information that could help them properly assess the terms of the fund’s contract with the sub-adviser. The Commission also says that MSIM’s involvement and oversight with AMMB was inappropriate. Not only did the investment adviser lack the written procedures to properly oversee its sub-advisers, but also, it lacked the procedures to review the work that AMMB did.
The SEC also claims that since no advisory services were actually provided by AMMB, MSIM ended up submitting false information in its semi-yearly and yearly reports. Per the Commission’s order, MSIM violated sections of the Investment Company Act and Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.
By agreeing to settle, MSIM isn’t denying or agreeing to the SEC’s findings. It has, however, agreed to a cease and desist from future violations of both acts and Rule 206(4)-7 thereunder. Of the $3.3 million settlement, $1.5 million is a penalty.
The Malaysia Fund is a closed-end company belonging to Morgan Stanley’s funds complex. MSIM and the Fund entered into a written advisory agreement in 1987. MSIM gives the Fund investment management services, as well as serves as Fund administrator.
Per Section 15(a) of the Investment Company Act, no person can act as a registered investment company’s investment adviser without a written contract that meets certain requirements and has been approved by most voting securities. The original contract can continue to be renewed as long as the Board or most of the outstanding voting securities approves it.
SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement, SEC, November 16, 2011
SEC charges Morgan Stanley Investment Management with violations, Miami Herald, November 16, 2011
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Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Fraud, September 17, 2011
Morgan Stanley Smith Barney Employee Fined and Suspended by FINRA Over Unauthorized Signatures, Stockbroker Fraud Blog, September 19, 2011
If you are an institutional investor that has sustained financial losses because of broker misconduct, please contact our securities fraud lawyers today.