[Editor’s Note: The following post is authored by Ropes & Gray LLP]
On June 13, 2013, the SEC filed an order settling administrative proceedings against eight former directors of five Regions Morgan Keegan open- and closed-end funds that had been heavily invested in securities backed by subprime mortgages in the lead-up to the 2008 financial crisis. In the Order, the SEC found that the directors caused the funds to violate Rule 38a-1 under the Investment Company Act of 1940, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws.
Although it is unusual for the SEC to bring enforcement actions against directors of funds, George S. Canellos, Co-Director of the SEC’s Division of Enforcement, stated that the SEC settlement “sends a clear warning of our commitment to enforce the duty of mutual fund directors and trustees to closely oversee the process of valuing securities held by their funds.” Notably, this is the second time in the past few months that the SEC has directly sanctioned fund directors for alleged failures of oversight, including causing a fund’s violations of Rule 38a-1.
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