Sec & Morgan Stanley Reach A $3.3M Deal For Improper Charges

The U.S. Securities and Exchange Commission (SEC) announced on November 16, 2011 in SEC 2011-244 that it had charged Morgan Stanley Investment management (MSIM) with securities violations for charging improper fees.

Basically, the charges stemmed from MSIM charging The Malaysia Fund and its investors for advisory services they were not being provided by a third party. According to the release, the investigation revealed that MSIM was the primary investment adviser for The Malaysia Fund and it had informed investors that it had contracted a Malaysian sub-adviser to provide advice, research and assistance to MSIM, benefitting the fund and its investors. Simply put, the sub-adviser didn't do any of these things for the contract cost of $1.845 million over a decade's time span however, the board continued to renew the annual contract based upon the misrepresentations of MSIM.

The sub-adviser who was allegedly providing the "investment advice, research and assistance" was a subsidiary of AM Bank Group in Malaysia (AMMB). The only thing AMMB ever provided was two reports that were based on public information, which were not even used by MSIM in its management of the fund.

It was found that MSIM had inadequate supervisory procedures in effect to review and oversee the work performed by sub-advisers like AMMB. As a result, MSIM failed in its duty to provide the fund's board members with everything they needed to evaluate and review prior to renewing the sub-adviser contract. Additionally, MSIM was responsible for preparing the fund's annual and semi-annual reports to shareholders, which included false information about AMMB providing investment advice to MSIM. Eric I. Bustillo, Director of the SEC's Miami Regional Office, issued the following statement: "Not only did MSIM's internal controls fail in allowing this purported services arrangement to go on, but the firm repeatedly issued reports to investors that inaccurately represented those services. MSIM clearly lost sight of this sub-adviser." According to the SEC order, the contract with AMMB was terminated in early 2008 following an SEC investigation.

An agreement to settle the charges was reached with the SEC, whereby MSIM would pay over $3.3 million. The SEC order found that MSIM wilfully violated Sections 15(c) and 34(b) of the Investment Company Act and sections 206(2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder. As usual in these settlements, MSIM agreed to a censure and to cease and desist from violating those provisions in the future. The settlement breakdown was as follows: $1.845 million to repay the sub-adviser's contract amount and $1.5 million as a monetary fine. MSIM also agreed to revise its policies and procedures regarding third party service providers.

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