In our April Update, we reported that the SEC had reached a tentative settlement agreement with former Morgan Keegan directors relating to charges that they failed to adequately oversee the fair valuation of securities in five Morgan Keegan funds that were heavily invested in securities backed by subprime mortgages. The six independent and two interested directors reached a settlement in principle with the SEC on March 27th, just days before the start of an administrative hearing on the matter. Details of the settlement were not known until the SEC announced a final settlement on June 13, 2013. The settled order finds that the directors caused the funds' violations of Rule 38a-1 under the Investment Company Act, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws. The directors were ordered to cease and desist from committing or causing any violations and any future violations of that rule. The directors consented to the entry of the settled order without admitting or denying any of the findings. Although no monetary penalties were imposed, an SEC enforcement action against individual directors is unusual and signals the importance that the SEC assigned to the matter.

"Our 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," said George S. Canellos, Co-Director of the SEC's Division of Enforcement.

Under the securities laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available. In addition, fund directors must determine the methodologies to be used to fair value securities and must periodically reevaluate the appropriateness of those methodologies. The SEC took the opportunity to remind directors of its position that while directors may engage others to calculate fair values, they are ultimately responsible for valuations of portfolio securities, citing Accounting Series Release No. 118 (Dec. 23, 1970).

_{Sources: Former Mutual Fund Directors Agree to Settle Claims That They Failed to Properly Oversee Asset Valuation, SEC Press Release 2013-111 (June 13, 2013); In the Matter of J. Kenneth Alderman, CPA; Jack R. Blair; Albert C. Johnson, CPA; James Stillman; R. McFadden; Allen B. Morgan Jr.; W. Randall Pittman, CPA; Mary S. Stone, CPA; and Archie W. Willis III; Investment Company Act Release No. 30557 (June 13, 2013).}