Morgan Stanley Investment Management agreed to pay $3.3 million in a case involving billing for subadvisory services in Malaysia that the SEC said were not rendered.

The SEC’s Enforcement Division Asset Management Unit has been focused on fee arrangements with registered funds.

In in investigation by the Asset Management Unit of the SEC’s Enforcement Division, the regulator found that Morgan Stanley represented to the board of The Malaysia Fund and its investors that it had contracted with a subadviser in that Asian nation for advice, research and assistance in investing in stocks.

“The sub-adviser did not provide these purported advisory services, yet the fund’s board annually renewed the contract based on MSIM’s representations for more than a decade,’’ the SEC said Wednesday. 

The total cost to the fund’s investors: $1.8 million.

Morgan Stanley agreed to pay more than $3.3 million to settle the SEC’s charges.

The Asset Management Unit has been looking into the investment advisory contract renewal process and fee arrangements in the fund industry. This case is a result.

“We want to take the advisory fee setting process out of the shadows by scrutinizing the role of investment advisers and fund board members in vetting fee arrangements with registered funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

The fees in this case were charged from 1996 to 2007 and revolve around Section 15(c) of the Investment Company Act of 1940. That act requires an investment adviser to provide a fund’s board with information that is “reasonably necessary” to evaluate the terms of any contract from an investment adviser of a registered investment company.

“MSIM failed in its duty to provide the fund’s board members with the information they needed to fulfill their significant responsibility of reviewing and approving the sub-adviser’s contract,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC, Morgan Stanley arranged The Malaysia Fund’s sub-advisory agreement with a subsidiary of AM Bank Group, one of the largest banking groups in Malaysia. The SEC found that AMMB merely provided two monthly reports based on publicly available information that Morgan Stanely neither requested nor used in its management of the fund.

The regulator called Morgan Stanley’s oversight and involvement “wholly inadequate.”

Morgan Stanley agreed to repay the fund $1.8 million for the sub-adviser’s fees and pay a $1.5 million penalty.

“The settlement fully resolves the SEC’s investigation into MSIM, and we are pleased to put the matter behind us,” Morgan Stanley said in an emailed statement.

The investment manager also agreed to implement policies and procedures specifically governing the Section 15(c) process and its oversight of service providers.

Here is the SEC complaint.

-- This article first appeared on Securities Technology Monitor.



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