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SEC Issues "Cease and Desist" Order for Improper Fee Arrangement

On November 16, 2011, the SEC issued a "Cease and Desist" order against Morgan Stanley Investment Management ("the adviser") for paying fees to an unaffiliated entity for research services (that the order characterizes as sub-adviser) that the SEC states were not rendered to a closed-end fund. These fee payments were made from 1996 through 2007.

The order states that during each year in which the fund paid fees for the services, the adviser represented to the fund's board that the subadviser was providing services for the benefit of the fund.   Specifically, the adviser gave the board reports concerning the services purportedly provided.  The order notes that the board relied upon these materials in approving the continuation of the contract each year.

According to the order, contrary to the representations provided to the fund board, the adviser had no written procedures in place governing oversight of sub-advisers, nor any procedures for reviewing the work allegedly done pursuant to the contract in question. 

The SEC found that the adviser violated section 15(c) of the Investment Company Act by failing to provide the board with the information necessary for the board to evaluate the nature, quality and cost of the services provided, and section 34(b) of that Act by providing misleading information to shareholders in annual and semi-annual reports.  The SEC also found that the adviser violated the Advisers Act by failing to adopt and implement policies and procedures reasonably designed to detect and prevent violations of the Advisers Act.

Under the terms of the order, the adviser will reimburse the fund the full amount of the fees paid for services not provided to the fund.  The adviser will also pay a fine of $1,500,000 to the U.S. Treasury.

The full text of the order can be found here.