In the Matter of J. Kenneth Alderman, CPA
Securities and Exchange Commission
Investment Company Act Release No. 30557 (2013)
J. Kenneth Alderman and seven other individuals (the directors) were directors of five registered investment companies (the funds). Morgan Asset Management, Inc. (Morgan Asset) served as investment adviser to the funds, and Morgan Keegan & Company, Inc. (Morgan Keegan) provided accounting services to the funds. A substantial portion of the funds’ assets were invested in below-investment-grade debt securities, for which market-price quotations were not readily available. Under these circumstances, per the funds’ valuation procedures, Morgan Asset’s valuation committee was required to determine the securities’ fair values. The procedures listed certain factors for the committee to consider but contained little guidance on how to conduct the valuation, and the directors provided no additional guidance. Although the procedures required the committee to deliver written quarterly reports to the directors, those reports often omitted important information about the committee’s valuation determinations, and the directors were not required to—and did not—ratify those determinations. As a result, the directors were unaware of numerous flaws in the actual valuation process, which was overseen by the committee but carried out day-to-day by Morgan Keegan employees. As part of that process, the Morgan Keegan employees routinely permitted the funds’ portfolio manager to arbitrarily adjust the values of many of the securities held by the funds and engaged in other practices that had the effect of lessening a decline in the funds’ net asset values over a four-month period. This meant that the prices at which the funds sold, redeemed, and repurchased their shares during that period were inaccurate. The directors were provided with quarterly price and fair-value information on securities sold from the funds’ portfolios but no such information on the securities not sold, which represented most of the funds’ fair-valued securities. This meant the directors lacked information about potentially stale pricing of a substantial portion of the funds’ assets. Although the funds’ independent auditors advised the directors that the funds’ valuation procedures were appropriate and reasonable, this did not fulfill the directors’ obligation to inform themselves about the valuation methodologies being used by the valuation committee and the Morgan Keegan employees. The Securities and Exchange Commission (SEC) brought an administrative proceeding against the directors for causing violations of Rule 38a-1 under the Investment Company Act of 1940 (Company Act).
Rule of Law
Holding and Reasoning ()
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