|* * * * * * * * * * * * * * * * * *
IN THE MATTER OF:
MORGAN KEEGAN &
* * * * * * * * * * * * * * * * * *
DOCKET NO. CO-11-7966-S
I. PRELIMINARY STATEMENT
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, the Respondents, through their execution of this Consent Order, each voluntarily waive the following rights:
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
To present evidence and argument and to otherwise avail themselves of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
|3.||To present their respective positions in a hearing in which each is represented by counsel;|
|4.||To have a written record of the hearing made and a written decision issued by a hearing officer; and|
|5.||To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;|
NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
The Respondents each admit the jurisdiction of the Commissioner and consent to the entry of this Consent Order by the Commissioner.
IV. FINDINGS OF FACT
|1.||The seven (7) funds at issue are Regions Morgan Keegan Select Intermediate Bond Fund (“Intermediate Bond Fund”), Regions Morgan Keegan Select High Income Fund (“Select High Income Fund”), Regions Morgan Keegan Advantage Income Fund (“Advantage Income Fund”), Regions Morgan Keegan High Income Fund (“High Income Fund”), Regions Morgan Keegan Multi-Sector High Income Fund (“Multi-Sector High Income Fund”), Regions Morgan Keegan Strategic Income Fund (“Strategic Income Fund”), and Regions Morgan Keegan Select Short Term Bond Fund (“Short Term Bond Fund”) (collectively, the “Funds”).|
Six (6) of the seven (7) Funds were largely invested in mezzanine and lower subordinated “tranches,” or slices, of structured debt instruments, which carry more risk than the senior tranches. 1 The Funds were comprised of many of the same holdings. On June 30, 2007, approximately two-thirds (2/3) of the holdings of the four (4) closed-end funds and the Select High Income Fund were substantially identical. Approximately one quarter (1/4) of the Intermediate Bond Fund’s holdings corresponded to the holdings of the five (5) high yield Funds. The Funds were highly correlated, meaning they behaved like each other under similar market conditions. The combination of subordinated tranche holdings and the high correlation of the Funds caused investors owning more than one (1) of these funds to have a heightened risk of over concentration.
The Funds were created and managed by James Cooper Kelsoe, Jr. (CRD number 2166416) (“Kelsoe”), MAM Senior portfolio manager. Kelsoe was also principally responsible for the purchase and sale of all of the holdings in the Funds.
|4.||When WMS ceased reporting and dropped its coverage of the Select Intermediate Bond Fund and Select High Income Fund in July 2007, it failed to announce the drop in coverage in writing until November, 2007. WMS did not publish a withdrawal of its prior analysis or recommend the Funds’ replacement.|
On January 19, 2007, WMS announced it was reclassifying the Intermediate Bond Fund on the Select List from “Fixed Income” to “Non-Traditional Fixed Income.” Meanwhile, WMS profiles for the Intermediate Bond Fund continued to label it as the “Intermediate Gov’t/Corp Bond.”
Certain of the Funds’ annual, semi-annual, and quarterly reports filed with the SEC did not adequately disclose the risks of subordinated tranches and the quantity of subordinated tranches held within the Funds.
|7.||MAM produced quarterly glossies for all seven (7) Funds. In the glossies, MAM did not adequately describe the risks of owning the lower tranches of structured debt instruments or the quantity of such holdings within the Funds.|
|8.||MKC, through WMS, produced quarterly Fund Profiles for the Intermediate Bond Fund, the Select High Income Fund, and the Short Term Bond Fund that did not adequately describe the risks of owning the lower tranches of structured debt instruments or the quantity of such holdings within the Funds.|
|9.||In SEC filings and state notice filings of March and June 2007 involving the Funds, Four Hundred Million Dollars ($400,000,000) of what MAM characterized as corporate bonds and preferred stocks were, in fact, the lower, subordinated tranches of asset-backed structured debt instruments. MAM eventually reclassified certain of these structured debt instruments in the March 2008 Form N-Q Holdings Report for the three (3) open-end funds.|
|10.||In SEC filings, MAM compared the four (4) closed-end funds and the Select High Income Fund (collectively the “RMK high-yield funds”), which contained approximately two-thirds (2/3) structured debt instruments, to the Lehman Brothers U.S. High Yield Index (“Lehman Ba Index”). The Lehman Ba Index is not directly comparable to the RMK high-yield funds given the fact that the Lehman Ba Index contained only corporate bonds and no structured debt instruments.|
|11.||Certain marketing materials and reports minimized the risks and volatility associated with investing in funds largely comprised of structured debt instruments. In the June 30, 2007 glossy, and in previous quarterly glossies created by MAM, MAM and MKC marketed the Intermediate Bond Fund as a fund appropriate for “Capital Preservation & Income.” MAM later revised the Intermediate Bond Fund glossy in September 2007 by removing the caption “Capital Preservation & Income” and replacing it with “Income & Growth,” and by removing the word “stability,” which had previously been used to describe the fund.|
|12.||The Intermediate Bond Fund glossies dated June 30, 2007 and September 30, 2007 stated that the Intermediate Bond Fund “does not invest in speculative derivatives.” However, the Intermediate Bond Fund did use derivatives, including interest-only strips, and collateralized debt obligations (CDOs), which are derived from the mezzanine and lower tranches of other debt securities.|
|13.||Respondent MKC through WMS labeled the Intermediate Bond Fund with varying names. None of the three labels - “Taxable Fixed Income”, “Enhanced Low-Correlation” and “Intermediate Gov’t/Corp Bond” - used by MKC adequately portrayed the nature of the Intermediate Bond Fund, of which approximately two-thirds (2/3) of the portfolio was invested in the mezzanine or lower subordinated tranches of structured debt instruments. The label “Gov’t/Corp Bond,” which first appeared on the December 31, 2006 profile sheet, was never changed after that date.|
A. Supervision and Supervisory Due Diligence
During the period January 1, 2007 through July 31, 2007, preceding the collapse of the subprime market, MAM made 262 downward price adjustments for the purpose of adjusting the net asset value of the Funds. In some instances, MAM’s communications led MKC, through its sales force, to actively discourage investors from selling the Funds - even while fund prices continued to decline - by advising investors to “hold the course.” Some members of MKC, MAM, and their management personnel continued during this period to advise FAs and investors to buy the Funds through, inter alia, statements that characterized the decline as “a buying opportunity.”
MKC and MAM failed to adequately supervise the flow of information to the MKC sales force concerning the Funds. For example, in conference calls with the sales force, the senior portfolio manager for the Funds cited sub-prime fears and liquidity as the primary factors for a decline in the net asset value of the Funds without fully explaining the market impact on certain securities held by the Funds.
|16.||WMS did not complete a thorough annual due diligence report of the open-end funds and the management of the open-end funds in 2007. A fixed income analyst for WMS, attempted to complete an annual due diligence review of the open-end funds and the management of the open-end funds in the summer of 2007, but was unsuccessful due to Kelsoe’s and MAM’s failure to provide sufficient information and Kelsoe’s failure to be available for a meeting during normal operating hours. Subsequently, WMS failed to notify the MKC sales force of WMS’ failure to complete the annual on-site due diligence review. An incomplete draft of WMS’ annual due diligence report for internal use only was submitted by the WMS analyst, but it was neither completed nor released to the sales force.|
|17.||On July 31, 2007, WMS dropped coverage of all proprietary products, which included the funds for which WMS could not produce a thorough report. This fact was not disclosed in writing to the sales force until November 2007.|
|18.||Based on WMS’ one (1) page, one (1) paragraph report of the August 18, 2006 on-site due diligence review, the due diligence visits by the WMS fixed income analysts were not “detailed, thorough, and exhaustive,” as advertised by MKC. There are two (2) WMS profiles of the Intermediate Bond Fund dated September 30, 2006. The sections titled “investment philosophy” in the profile sheets contain substantial differences. The first WMS profile for the Intermediate Bond Fund, based on the information for the quarter ending September 30, 2006, is titled “Taxable Fixed Income.” The first profile, much like previous quarterly profiles, does not refer to any of the holdings as “inferior tranches.” Neither does it mention potential lack of demand and lack of liquidity. Further, it includes the statement that “The fund does not use derivatives or leverage.”|
|19.||WMS’ changing of the Intermediate Bond Fund profile label indicated WMS’ inability and lack of supervision in the creation of these marketing pieces to accurately categorize the Intermediate Bond Fund. Within one (1) quarter, WMS identified the Intermediate Bond Fund three (3) different ways:|
|20.||The “Gov’t/Corp Bond” label implied that the Intermediate Bond Fund holdings were predominately government and corporate bonds carrying a certain degree of safety. This improper labeling indicates a failure to conduct proper due diligence, a duty of MKC.|
|21.||In addition, all profiles for the Intermediate Bond Fund from March 31, 2006, through June 30, 2007, stated that Kelsoe was joined by Rip Mecherle (“Mecherle”) as assistant portfolio manager. Mecherle left MAM in 2004. The failure to detect the errors in promotional materials relating to management does not reflect the “detailed, thorough, and exhaustive due diligence” claimed by MKC in its sales and promotional material distributed to investors.|
B. Suitability of Recommendations
|22.||Respondent MAM indicated that risks and volatility were minimized in the Intermediate Bond Fund portfolio. In the June 30, 2007 glossy, and previous quarterly glossies created by MAM, Respondents marketed the Intermediate Bond Fund’s broad diversification of asset classes three (3) times on the first page of each of the glossies, when in fact, approximately two-thirds (2/3) of the Intermediate Bond Fund portfolio was composed of structured debt instruments which included risky assets. The four (4) closed-end funds also advertised diversification among asset classes, despite the similarities in asset classes as set forth in Section C below.|
Furthermore, the glossies emphasized the Select High Income Fund’s net asset value as being less volatile than typical high-yield funds. The glossies failed to state that a reason for any lower volatility was that the structured debt instruments within the Select High Income Fund were not actively traded, and that the daily fair value adjustments of certain holdings were imprecise in a market that became illiquid.
In certain cases, MKC and its sales force failed to obtain adequate suitability information regarding risk tolerance that was necessary to determine suitability for using the Funds for regular brokerage account customers. New account forms for regular brokerage accounts provided a menu of four (4) investment objectives to choose from: Growth, Income, Speculation, and Tax-Advantaged. Risk tolerance was not addressed by the form, was not noted by the sales force whose records were examined during the investigation, and may not have been taken into consideration when the sales force made its recommendations.
|25.||In at least one instance, an agent of MKC provided a customer with a self-made chart assuming the hypothetical growth of One Hundred Thousand Dollars ($100,000.00) over five (5) years, and comparing the rate of return on CDs to the return on the Intermediate Bond Fund. The chart failed to address any risks of investing in the fund, save the caption “Not FDIC Insured.”|
C. Advertisements by Respondents
Marketing glossies prepared by MAM for the Intermediate Bond Fund and Select High Income Fund contained allocation pie charts dividing the categories of holdings by percentages of the total portfolio. Between June 2004 and March 2005, the pie charts for both funds changed significantly: MAM divided the category originally titled “asset-backed securities” into multiple categories. These changes indicated that the holdings of these Funds were more diversified than they actually were because the majority of the portfolios continued to be invested in asset-backed securities.
The pie charts in the glossies for the High Income Fund were also changed in a similar manner between June 2004 and March 2005.
Similar changes were also made to pie charts in glossies for the Advantage Income Fund and the Strategic Income Fund between December 2004 and March 2005.
|29.||Respondent MKC used different index comparisons in the Select High Income Fund “Profile” sheets produced by WMS. These profile sheets compared the Select High Income Fund to the Credit Suisse First Boston High Yield Index, as well as the Merrill Lynch US High Yield Cash BB Index. These two indices only contain corporate bonds and no structured debt instruments. The Select High Income Fund contained substantially different risks than the portfolios within either of the two indices, and therefore these benchmarks were not directly comparable.|
D. Required Examinations of Customer Accounts to
Detect and Prevent Irregularities or Abuses
While the models for WMS managed accounts limited the use of the Intermediate Bond Fund to certain percentages, usually no more than fifteen percent (15%) of any client’s portfolio, there was no such limitation for non-managed accounts. Additionally, no guidance was provided to the FAs regarding limiting concentrations of the Intermediate Bond Fund in non-managed accounts. As a result, certain customer accounts contained in excess of a twenty percent (20%) concentration of the Intermediate Bond Fund.
The four closed-end funds, the Select High Income Fund and the Intermediate Bond Fund were all highly correlated. However, MKC provided limited guidance to the FAs regarding limiting concentrations of combinations of the Funds in non-managed accounts.
Up until six (6) months before the collapse of the fund, WMS classified the Intermediate Bond Fund as “Core Plus” in the Fixed Income section of the Select List. At that time, it was reclassified as “Alternative Fixed Income” in the Non-Traditional section of the Select List. Yet MKC’s concentration for many of its non-WMS managed accounts continued to be above twenty percent (20%) which could indicate its use as a core holding. An e-mail chain from Gary S. Stringer of WMS states as follows:Certain MKC brokers and branch managers interviewed during the investigation stated that they received limited or no guidance as to appropriate concentrations of the Funds to use within clients’ accounts.
E. Requirement to Conduct an Adequate and Thorough Correspondence Review
An agent of MKC provided one known customer with a self-made chart assuming the hypothetical growth of One Hundred Thousand Dollars ($100,000) over five (5) years, and comparing the rate of return on CDs to the return on the Intermediate Bond Fund. The chart failed to address any risks of investing in the fund, save the caption “Not FDIC Insured.”
The MKC agent referred to in the preceding paragraph created a sales illustration in which he compared the returns for the Intermediate Bond Fund to the returns for traditional bank CDs. The agent used the illustration in order to market the Intermediate Bond Fund to bank customers. The agent stated that he created the illustration and that the illustration was not reviewed or approved by appropriate supervisory personnel of MKC. The chart fails to address any risks of investing in the Intermediate Bond Fund, save the caption “Not FDIC Insured.”
Carter Anthony, President of MAM from 2001 until the end of 2006, has testified under oath that he conducted performance reviews of all MAM mutual fund managers that included reviews of their portfolios and trading. However, he testified that he did not conduct the same supervisory review and oversight of Kelsoe and the Funds because he was instructed to “leave Kelsoe alone.” MAM denies that any such instruction was given.
|36.||In December 2001, Kelsoe signed a new account form as branch manager, when he, in fact, was never a branch manager nor held any supervisory/compliance licenses. Proper supervision of Kelsoe’s activities would have detected such an unauthorized action on his part.|
G. Maintenance of Required Books and Records
MAM’s Fund Management fundamental and qualitative research was touted in marketing and research material.
|38.||MAM, through its Portfolio Managers, selected securities for investments by the Funds’ portfolios. MAM was consulted regarding the fair valuation of certain securities held by the portfolios. Adequate documentation was not retained as to pricing adjustments recommended by MAM to be made to certain of the securities.|
|39.||WMS performed annual due diligence reviews of certain of the Funds and Fund management (MAM and Kelsoe). In mid-2007, MAM and Kelsoe did not provide sufficient information to allow completion of the 2007 annual due diligence review conducted by MKC through WMS. Kelsoe did not make himself available for a meeting during normal operating hours, further delaying the completion of WMS’ on-site due diligence review. As a consequence, the report for two of the open-end funds was not completed. By August 2007, WMS dropped coverage of proprietary products and a report for 2007 was never released to the MKC sales force.|
H. Responsibilities and Conduct of James C. Kelsoe, Jr.
In addition to his duties regarding management of the Funds and selection of investments, Kelsoe was responsible for reviewing information regarding holdings of the Funds to be included in marketing materials and filings with the SEC. Kelsoe also was responsible for supervising his staff’s involvement with these processes, as well as their interaction with third parties. Kelsoe had the most knowledge at MAM about the nature of the holdings of the Funds, including the types of securities being purchased or sold for the Funds, the risks associated with the holdings, and the correlation of the holdings among the Funds. Kelsoe and his staff provided information for the preparation of regulatory filings, marketing materials, reports and communications about the Funds. Kelsoe contributed to and delivered commentaries for the Funds and management discussions of fund performance. The SEC filings for the Funds, for which Kelsoe and his staff furnished information regarding holdings of each of the Funds, were provided to Kelsoe for his review prior to filing.
|41.||Kelsoe contributed to and was aware of the usage of the glossies and certain other marketing materials for the Funds by MAM, as described above, including the descriptions of the Funds, the allocation pie charts, the use of benchmarks, and characterizations of risks and features of the Funds.|
|42.||Kelsoe’s involvement in the fair valuation process for securities held by the Funds during the period from January 1, 2007 to July 31, 2007, including influencing some dealer confirmations that were returned, contributed to certain inaccurate valuations of selected holdings on various dates during that period.|
|43.||From January 1, 2007 through July 31, 2007, Kelsoe did not retain documentation relating to his recommendations of price changes of certain securities held by the Funds. These recommendations were used on occasion in the calculation of the daily net asset values of the Funds.|
|44.||From January 1, 2007 through July 31, 2007, Kelsoe failed to review and approve certain emails and other communications of his staff that characterized the downturn of the market for certain securities contained within the Funds as a “buying opportunity,” which were circulated to certain MKC FAs.|
V. CONCLUSIONS OF LAW
|1.||The Commissioner has jurisdiction over this matter pursuant to the Act.|
In violation of Sections 36b-4(b) and 36b-5(f) of the Act, MKC and/or MAM conducted and participated in the following practices:
In violation of Section 36b-31-6f(b) of the Regulations, MKC failed to reasonably supervise its agents, employees and associated persons in the following manner:
|4.||MKC engaged in dishonest or unethical practices in the securities business within the meaning of Section 36b-15(a)(2)(H) of the Act and Section 36b-31-15a(a)(2) of the Regulations by failing to make suitable recommendations to some investors as demonstrated by the following:|
In violation of Section 36b-31-6f(b) of the Regulations, MKC failed to enforce its supervisory procedures in the following manner:
|6.||In violation of Section 36b-31-6f(b) of the Regulations, MKC failed to enforce its supervisory procedures by, in many instances, failing to review correspondence and marketing materials used by associated persons to sell the Funds in the following manner:|
|7.||MKC engaged in dishonest or unethical practices in the securities business within the meaning of Section 36b-15(a)(2)(H) of the Act and Section 36b-31-15a(a)(20) of the Regulations by distributing marketing materials that were inaccurate.|
|8.||The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.|
VI. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and the Respondents’ consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
Entry of this Consent Order concludes the investigation by the Division and any other action that the Division could commence under the Act on behalf of Connecticut as it relates to MKC and MAM, any of their affiliates, and any of their past or present employees or other agents in any way relating to the Funds, and acceptance by the Commissioner of the settlement offer and payments referenced in this Consent Order shall be in satisfaction of and preclude any action that the Division could commence under the Act against the foregoing; provided however, that excluded from and not covered by this paragraph are (a) individual sales practice violations that could have been brought even if the violations asserted herein against MKC or MAM had not occurred, and (b) any claims by the Commissioner arising from or relating to violations of the provisions contained in this Consent Order. Nothing in this paragraph shall preclude the Commissioner from opposing a request for expungement by a past or present employee or other agent before a regulatory or self-regulatory entity, any court of competent jurisdiction, or any hearing officer, under such circumstances as the Commissioner deems appropriate.
This Consent Order is entered into for the purpose of resolving in full the referenced multistate investigation, and is not intended to be used for any other purpose.
MKC and MAM shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act.
Pursuant to this Consent Order and related Consent Orders of the states of Alabama (SC-2010-0016), South Carolina (File No. 08011), Kentucky (Agency Case No. 2010-AH-021/Administrative Action No. 10-PPC0267), Tennessee (Docket No. 12.06-107077J/Order No. 11-005), and Mississippi (Administrative Proceedings File No. S-08-0050), the offer of settlement in SEC Administrative Proceeding (File No. 3-13847) (the “SEC Order”) and the FINRA Letter of Acceptance, Waiver and Consent No. 2007011164502, MKC and MAM shall have paid or shall pay in resolution of all of these matters, within ten (10) days of the entry of the SEC Order the sum of Two Hundred Million Dollars ($200,000,000) to be distributed as follows: 1) One Hundred Million Dollars ($100,000,000) to the SEC’s Fair Fund to be established in this matter for the benefit of investors in the Funds that are the subject of the SEC Order; and 2) One Hundred Million Dollars ($100,000,000) to a States’ Fund to be established in this matter for the benefit of investors in the Funds that are the subject of this Consent Order. Any costs, expenses, and charges associated with the Fair Fund and States’ Fund management and distributions shall be paid by MKC and MAM and shall not diminish the fund corpus. The Fair Fund and the States’ Fund shall be distributed pursuant to distribution plans drawn up by the administrator(s) for the SEC’s portion (“Fair Fund Administrator”) and the States’ portion (“Fund Administrator”). The administrator(s) shall be chosen by the SEC and by a representative (the “States’ Fund Representative”) designated by the state agencies of Alabama, Kentucky, Tennessee, South Carolina and Mississippi. Nothing in this paragraph shall require or limit the SEC’s and the States’ choice of fund administrators which may or may not be the same entity or person for both funds.
Within ten days following the entry of this Consent Order by the Commissioner, MKC and MAM shall jointly and severally pay to the “Treasurer, State of Connecticut”, by certified bank check, electronic funds transfer or wire transfer, the sum of Seven Thousand Seven Hundred Seventy One and 00/100 Dollars ($7,771) as a monetary penalty, which amount constitutes the State of Connecticut’s share of the state settlement amount of Ten Million Dollars ($10,000,000). In the event another state securities regulator determines not to accept the settlement offer, the total amount of the payment to the State of Connecticut shall not be affected.
This Consent Order shall not disqualify MKC and MAM, or any of their affiliates or registered representatives from any business that they otherwise are qualified or licensed to perform under any applicable state law, and this Consent Order is not intended to and shall not form the basis for any disqualification or suspension in any state. Furthermore, this Consent Order is not intended to and shall not form the basis for any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self-regulatory organizations, or various states’ securities laws including but not limited to any disqualifications from relying upon the registration exemptions or safe harbor provisions.
The scope of the independent auditor’s engagement shall be approved by the States’ Representative prior to the commencement of the audit, and shall include, but is not limited to, reviews and examinations of:
|a)||All firm policies and procedures, relating to proprietary products and/or proprietary offerings including, but not limited to, supervisory, books and records, compliance and document retention policies and procedures;|
|b)||The composition of each proprietary fund sold or recommended to clients at least annually;|
|c)||All proprietary product and/or proprietary offering marketing materials used or distributed by their agents, representatives, or other employees or affiliates, at least quarterly;|
|d)||Potential/actual conflicts of interest with any affiliates, including Regions Morgan Keegan Trust, F.S.B., MKC and MAM, or affiliated persons/control persons. Said review shall be annual unless an increased frequency is deemed necessary by state, federal, and SEC entities; and|
|a)||Consult with the States’ Representative and the SEC about areas of concern prior to entering into an engagement document with MKC and MAM;|
|b)||Draft and provide reports as often as may be agreed upon by the States’ Representative and the independent auditor with an assessment of the status, compliance, and recommendations pertaining to the organizational, procedural, and policy issues that are the subject of the engagement;|
|c)||Simultaneously distribute copies of the reports from paragraph 12.b) above to MKC, MAM, the States’ Representative and the SEC. The States’ Representative may distribute the report to NASAA members as the States’ Representative deems appropriate. These reports will be deemed confidential and, upon receipt of any legal process or request pursuant to a state’s public information statute or a federal Freedom of Information Act (“FOIA”) request for access, the state regulator shall promptly notify MKC and/or MAM, in order that the Respondents shall have an opportunity to challenge the release of the information;|
|d)||Submit copies of all drafts, notes, and other working papers to coincide with the issuance of the reports;|
|e)||Issue recommendations for changes to policies, procedures, compliance, books and records retention programs, and all other areas that are the subject of the engagement;|
|f)||Establish reasonable deadlines for the implementation of the recommendations provided in the report; and|
|g)||For any recommendations noted but not included in the final report, provide justification for excluding the recommendation from the final report.|
|a)||Review the reports submitted by the independent auditor;|
|b)||Within sixty (60) days of the issuance of an audit report, submit, in writing, to the States’ Representative and the SEC any objections to implementation of any of the recommendations made by the independent auditor;|
|c)||If no objection to a recommendation is made within the sixty (60) day deadline, the recommendation will be implemented within the time frame established for the recommendation by the independent auditor in the report; and|
|d)||If objection is timely made to a recommendation, the States’ Representative and the SEC will consider the objections, review the recommendation and determine jointly whether implementation shall be required over the objections of MKC and MAM.|
|a)||Within one hundred twenty (120) days after the entry of this Consent Order, the Consultant shall make an Initial Report with recommendations thereafter on such policies and procedures and their implementation and effectiveness. The Initial Report shall describe the review performed and the conclusions reached, and will include any recommendations for reasonable changes to policies and procedures. MKC and MAM shall direct the Consultant to submit the Initial Report and recommendations to the States’ Representative and the SEC at the same time it is submitted to MKC and MAM.|
|b)||The parties hereto recognize that the Consultant will have access to privileged or confidential trade secrets and commercial or financial information and customer identifying information the public dissemination of which could place MKC and MAM at a competitive disadvantage and expose their customers to unwarranted invasions of their personal privacy. Therefore, it is the intention of the parties that such information shall remain confidential and protected, and shall not be disclosed to any third party, except to the extent provided by applicable FOIA statutes or other regulations or policies.|
|c)||Within thirty (30) days of receipt of the Initial Report, MKC and MAM shall respond in writing to the Initial Report. In such response, MKC and MAM shall advise the Consultant, the States’ Representative, and the SEC concerning what recommendations from the Initial Report MKC and MAM have determined to accept and those recommendations that they consider to be unduly burdensome. With respect to any recommendation that MKC and MAM deem unduly burdensome, MKC and MAM may propose an alternative policy, procedure or system designed to achieve the same objective or purpose.|
|d)||MKC and MAM shall attempt in good faith to reach agreement with the Consultant within sixty (60) days of the date of the receipt of the Initial Report with respect to any recommendation that MKC and MAM deem unduly burdensome. If the Consultant and MKC and MAM are unable to agree on an alternative proposal, MKC and MAM shall submit, in writing, to the States’ Representative and the SEC, their objections and any alternative proposal(s) made to the Consultant, and the States’ Representative and the SEC shall determine jointly whether implementation shall be required over the objections of MKC and MAM or whether to accept the alternative proposal(s). Within ninety (90) days of the date of the receipt of the Initial Report or, in instances in which an alternative proposal is submitted, ninety (90) days from a joint decision by the States’ Representative and the SEC regarding any objectionable portions of the Initial Report, MKC and MAM shall, in writing, advise the Consultant, the States’ Representative, and the SEC of the recommendations and proposals that they are adopting.|
|e)||No later than one (1) year after the date of the Consultant’s Initial Report, MKC and MAM shall cause the Consultant to complete a follow-up review of MKC’s and MAM’s efforts to implement the recommendations contained in the Initial Report, and MKC and MAM shall cause the Consultant to submit a Final Report to the States’ Representative and the SEC. The Final Report shall set forth the details of MKC’s and MAM’s efforts to implement the recommendations contained in the Initial Report, and shall state whether MKC and MAM have fully complied with the recommendations in the Initial Report.|
|f)||MKC and MAM shall cause the Consultant to complete the aforementioned review and submit a written Final Report to MKC, MAM, the States’ Representative and the SEC within three hundred sixty (360) days of the date of the Initial Report. The Final Report shall recite the efforts the Consultant undertook to review MKC’s and MAM’s policies, procedures, and practices; set forth the Consultant’s conclusions and recommendations; and describe how MKC and MAM are implementing those recommendations.|
|g)||To ensure the independence of the Consultant, MKC and/or MAM: (a) shall not have the authority to terminate the Consultant without prior written approval of the States’ Representative; (b) shall compensate the Consultant, and persons engaged to assist the Consultant, for services rendered pursuant to this Consent Order at their reasonable and customary rates; (c) shall not be in and shall not have an attorney-client relationship with the Consultant and shall not seek to invoke the attorney-client or any other privilege or doctrine to prevent the Consultant from transmitting any information, reports, or documents to the States; and (d) during the period of engagement and for a period of two (2) years after the engagement, shall not enter into any employment, customer, consultant, attorney-client, auditing, or other professional relationship with the Consultant. Notwithstanding the foregoing, the Consultant may serve as a Consultant for both MKC and MAM.|
|a)||Suitability as it applies to the various types of products/offerings, proprietary or otherwise, the FA sells at MKC;|
|b)||The type and nature of the holdings and risks attendant thereto in any proprietary product/offering sold by the firm, for which the firm or any affiliate purchased the underlying holdings, that the registered person will be selling or recommending to clients;|
|c)||The risks associated with the proprietary product/offering; and|
|d)||Conflicts of interest that may arise as a result of the sale/recommendation of the proprietary product/offering.|
|a)||Maintain a log of each agent/representative’s completed courses, copies of which they shall provide to the States’ Representative upon request;|
|b)||Only allow agents/representatives to sell/recommend proprietary products and/or proprietary offerings for which they have completed and verified training;|
|c)||Maintain an archive of all training material that may be accessed by agents/representatives on an as-needed basis after training is completed, copies of which they shall provide to the States’ Representative upon request;|
|d)||Maintain current training materials on proprietary products and/or proprietary offerings being offered or sold to any of their clients, copies of which they shall provide to the States’ Representative upon request;|
|e)||Maintain a manned product/offering help desk that is available to answer questions from agents/representatives during regular business hours. The person manning such product/offering help desk shall be registered with a minimum of a Series 65 or 7 license or registration; and|
|f)||Provide to the Commissioner an annual certification that MKC and MAM are in compliance with the required training and maintenance of training materials.|
|1.||The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;|
|2.||Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against any of the Respondents based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed; and|
|3.||This Consent Order shall become final when entered.|
|So ordered at Hartford, Connecticut||_______/s/_________|
|this 13th day of December 2011.||Howard F. Pitkin|
CONSENT TO ENTRY OF ORDER
I, Brian B. Sullivan, state on behalf of Morgan Asset Management, Inc., that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Morgan Asset Management, Inc.; that Morgan Asset Management, Inc. agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Morgan Asset Management, Inc. voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Morgan Asset Management, Inc. further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any monetary penalty or restitution that Morgan Asset Management, Inc. shall pay pursuant to the foregoing Consent Order. Morgan Asset Management, Inc. understands and acknowledges that these provisions are not intended to imply that the Commissioner would agree that any other amounts Morgan Asset Management, Inc. shall pay pursuant to this Consent Order may be reimbursed or indemnified (whether pursuant to an insurance policy or otherwise) under applicable law or may be the basis for any tax deduction or tax credit with regard to any state, federal, or local tax.
|Morgan Asset Management, Inc.|
|Name: Brian B. Sullivan|
County of: Jefferson
On this the 9th day of December, 2011, before me, the undersigned officer, personally appeared Brian B. Sullivan, who acknowledged himself to be the President of Morgan Asset Management, Inc., a corporation, and that he, as such President, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as President.
Date Commission Expires: 12/13/2014
CONSENT TO ENTRY OF ORDER
I, James T. Ritt, state on behalf of Morgan Keegan & Company, Inc., that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Morgan Keegan & Company, Inc.; that Morgan Keegan & Company, Inc. agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Morgan Keegan & Company, Inc. voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Morgan Keegan & Company, Inc. further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any monetary penalty or restitution that Morgan Keegan & Company, Inc. shall pay pursuant to the foregoing Consent Order. Morgan Keegan & Company, Inc. understands and acknowledges that these provisions are not intended to imply that the Commissioner would agree that any other amounts Morgan Keegan & Company, Inc. shall pay pursuant to this Consent Order may be reimbursed or indemnified (whether pursuant to an insurance policy or otherwise) under applicable law or may be the basis for any tax deduction or tax credit with regard to any state, federal, or local tax. Order.
|Morgan Keegan & Company, Inc.|
|Name: James T. Ritt|
|Title: General Counsel|
County of: Shelby
On this the 22nd day of November, 2011, before me, the undersigned officer, personally appeared James T. Ritt, who acknowledged himself to be the General Counsel of Morgan Keegan & Company, Inc., a corporation, and that he, as such General Counsel, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as General Counsel.
Date Commission Expires: April 6, 2014
1 The seventh, the Short Term Bond Fund, had significant investments in mezzanine and subordinated tranches of structured debt instruments.
2 Any such proprietary fund is specifically deemed to be subject to the oversight in paragraph 10.
3 The term “proprietary investment product” or “proprietary product” or proprietary fund, as used in this Consent Order, refers to those investment products or offerings which MKC and/or MAM have created or may create and for which they or any of their existing or future affiliates is the issuer and lead underwriter. This definition, however, shall not apply to proprietary products or offerings in existence at the time of affiliation with MKC or MAM through any future acquisition, merger or other form of business combination with an entity not currently under common control with MKC or MAM. Nor shall this definition apply to future proprietary products or offerings that are created following such acquisition, merger or other form of business combination, unless such proprietary products are created by MKC or MAM.
4 Time periods for retention of the Consultant, reports thereof, and other remedial obligations herein may run from the entry of earlier Consent Orders entered by states within the Task Force and shall not create duplicative obligations upon the Consultant or Respondents.
5 The time period for training may begin to run upon the entry of earlier Consent Orders by states within the Task Force and shall not create duplicative obligations on Respondents.