In the Matter of New York Life Investment Management LLC

New York Life Investment Management LLC (NYLIM) was the investment adviser to MainStay Equity Index Fund, a mutual fund offered by the MainStay Funds. NYLIFE LLC, a NYLIM affiliate, guaranteed each investor in the Equity Index Fund that if, 10 years after the investor’s purchase of the fund, the value of the investor’s shares, including distributions, was less than what the investor paid for them, NYLIFE would pay the investor the difference (guarantee). From 2002 to 2004, during meetings of the board of trustees of the MainStay Funds to address the annual renewal of the Equity Index Fund’s advisory contract with NYLIM, NYLIM urged the board to consider the guarantee when evaluating NYLIM’s management fee, which was very high compared to peers. Initially, NYLIM failed to inform the board of the estimated cost or value of the guarantee or the fact that NYLIFE had established a reserve for the guarantee. When NYLIM later made the board aware of an expense amount for the reserve, NYLIM did not explain that the expense reflected an increase in the reserve estimate, that the amount of the reserve equaled the present value of all expected future payments on the guarantee, or that the financial impact of the guarantee could be lessened by spreading its cost over time. It was not until 2004 that NYLIM provided the board with the assumptions NYLIM used to calculate the reserve and explained why NYLIM thought the reserve should be factored into an analysis of the Equity Index Fund’s profitability. Despite contending that the guarantee justified NYLIM’s high management fee, investor-disclosure documents prepared by NYLIM stated that neither the fund nor its shareholders would be charged for the guarantee. The Securities and Exchange Commission (SEC) brought an administrative proceeding against NYLIM for violations of the Investment Company Act of 1940 (Company Act) and the Investment Advisers Act of 1940 (Advisers Act).