Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 27, 2009

Investment Adviser Censured for Failure to Provide Fund Directors with Information in Contract Renewal Process

On May 27, the SEC settled charges against investment adviser New York Life Investment Management LLC (NYLIM) for failing to provide the Board of the Mainstay Equity Index Fund (Equity Index Fund), a mutual fund NYLIM advises, with information during the investment advisory contract renewal process and for making false or misleading statements in filings with the Commission. The Equity Index Fund seeks to replicate the movements of the S&P 500 index before expenses and has a "Guarantee" feature, under which a NYLIM affiliate guarantees that the value of a shareholder's investment on the tenth anniversary of purchase will be at least equal to the initial investment if all distributions are reinvested.

According to the SEC, from March 2002 through June 2004, the disinterested members of the Board of Trustees as well as the Board of Trustees of The MainStay Funds, approved the renewal of three investment advisory contracts between NYLIM and the Equity Index Fund. For each contract renewal process, the Board of Trustees received information showing that the management fees NYLIM charged to the Equity Index Fund were among the highest of the Equity Index Fund's peer-group of mutual funds. NYLIM urged the Board of Trustees to consider the Guarantee feature of the Equity Index Fund in evaluating the management fees NYLIM proposed, but, in violation of Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 15(c) of the Investment Company Act of 1940 (Investment Company Act), failed to provide the Board of Trustees information reasonably necessary to evaluate the cost of the Guarantee. Moreover, at the same time that NYLIM was claiming that the Guarantee should be considered to justify the Equity Index Fund's management fees, NYLIM was filing with the Commission, in violation of Section 34(b) of the Investment Company Act, prospectuses, annual reports, and registration statements in which it misrepresented that there was "no charge" to the Equity Index Fund or its shareholders for the Guarantee.

NYLIM consented, without admitting or denying the Commission's findings, to the issuance of the Commission's Order. NYLIM was censured and ordered to pay disgorgement of $3,950,075, prejudgment interest of $1,350,709, and a penalty of $800,000. NYLIM was also ordered to distribute the disgorgement, prejudgment interest, and penalty to affected shareholders of the Equity Index Fund.

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