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Univ. of Toledo College of Law

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Saturday, May 30, 2009

SEC Settles Two Proceedings Involving Undisclosed Marketing Agreements

The SEC settled two administrative proceeding involving an undisclosed marketing arrangement between BISYS Fund Services, a mutual fund administrator, and AmSouth Bank (AmSouth), a mutual fund adviser.  In one, J. David Huber, former BISYS Fund Services, Inc. (BISYS), president and former chairman of the AmSouth Funds' board of trustees, settled charges that he facilitated the marketing agrement.  According to the SEC, acting through Huber and others, BISYS entered into a 1999 side agreement with AmSouth pursuant to which BISYS was to rebate a portion of its administration fee to the fund advisers in exchange for their promise to continue recommending BISYS as an administrator to the funds’ boards of trustees. Following execution of the side agreement, BISYS paid for marketing expenses incurred by the advisers to promote the funds. Occasionally, the fund adviser also used the money dedicated by BISYS to pay expenses unrelated to marketing. Huber executed the 1999 side agreement with AmSouth, on behalf of BISYS. Huber, however, did not disclose either the existence of the 1999 side agreement or its terms to the boards of trustees or shareholders for the AmSouth mutual funds. As part of his settlement, Huber agreed to pay a total of $18,000 in disgorgement and prejudgment interest.

The other proceeding involved an attorney, Melissa M. Hurley, who was senior vice president and general counsel of BISYS from May 1998 to approximately 2002, and executive vice president and general counsel of BISYS from approximately 2002 through 2006.  According to the SEC, Hurley reviewed draft side agreements, including AmSouth’s 1999 and 2000 side agreements, and knew that the marketing arrangement should be disclosed to fund trustees and shareholders. Hurley did not disclose the terms of the side agreements to the fund trustees or shareholders. In 2003, Hurley also drafted a disclosure template concerning the marketing arrangements for certain fund shareholders, and reviewed and commented on a disclosure template for certain fund boards of trustees. These disclosure templates did not disclose material facts such as the written nature of the agreements, the exchange of a portion of the administration fee for a recommendation to the fund boards, or the source of funds used for marketing.  The SEC charged that Hurley willfully aided and abetted and caused AmSouth Asset Management’s violations of Sections 206(1) and 206(2) of the Advisers Act.  As part of her settlement, Hurley agreed to pay $15,000 in disgorgement, prejudgment interest, and a $15,000 civil penalty.


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