The Securities and Exchange Commission issued an enforcement action Tuesday against AmSouth Bank and AmSouth Asset Management for defrauding the AmSouth mutual funds by using a portion of administrative fees that shareholders paid for marketing and other unrelated expenses that should have been paid out of the investment advisors coffers. Those expenses included the salary, bonus, benefits and country club membership of the president of the AmSouth Funds.
The SEC said that AmSouth entered into improper side agreements with the funds administrator, BISYS Fund Services, for BISYS to rebate $16 million of the $49 million administration fee that the AmSouth funds in exchange for the funds to recommend BISYS as the administrator.
In addition, the SEC found that BISYS paid AmSouth $1.161 million as a consulting fee for its advice on how to market its own funds, without disclosing either of these agreements to the funds independent trustees or shareholders.
This is the Commissions first case against a mutual fund advisor that secretly used a portion of the administrative fees paid by the funds shareholders to pay for marketing expenses that should have been paid out of the advisors own pocket, said Linda Chatman Thomsen, director of the SECs division of enforcement. The Commission demands transparency in mutual fund disclosures and will not tolerate advisors that seek to hide their own marketing expenses in other types of fees charged to fund shareholders.
Without admitting or denying the charges, AmSouth Asset Management agreed to pay $11.4 million, consisting of $7.7 million in disgorgement, prejudgment interest of $2.2 million and a $1.5 million penalty.