Washington, D.C., Sept. 23, 2008 (LAWFUEL) – The Securities and Exchange Commission today issued an enforcement action against AmSouth Bank and AmSouth Asset Management (AmSouth) for defrauding AmSouth mutual funds by secretly using a portion of administrative fees paid by fund shareholders for marketing and other unrelated expenses that should have been paid by AmSouth itself.
The SEC’s order finds that AmSouth entered into improper and undisclosed side agreements with BISYS Fund Services (BISYS), the administrator of the AmSouth Funds. BISYS rebated approximately $16 million of its total $49 million administration fee for AmSouth to pay marketing expenses, with the understanding that AmSouth would continue to recommend BISYS as an administrator for the AmSouth Funds to the AmSouth Funds’ board of trustees. The SEC’s order also finds that money was used to pay expenses entirely unrelated to marketing, including the salary, bonus, benefits, and country club membership of the president of the AmSouth Funds.
AmSouth, now part of Regions Bank, agreed to settle the SEC’s enforcement action by paying a total of $11.4 million, which will be placed in a Fair Fund that Regions Bank will distribute to the funds, now managed by the Pioneer Group.
“This is the Commission’s first case against a mutual fund adviser that secretly used a portion of the administrative fees paid by the fund’s shareholders to pay for marketing expenses that should have been paid out of the adviser’s own pocket,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The Commission demands transparency in mutual fund disclosures and will not tolerate advisers that seek to hide their own marketing expenses in other types of fees charged to fund shareholders.”
Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office, added, “AmSouth breached its fiduciary duty to investors of the AmSouth Funds with these secret side agreements. The Commission will not stand for fiduciaries like AmSouth placing their own interests before the interests of the funds they advise.”
The SEC’s order finds that in addition to the side agreements, BISYS and AmSouth agreed that in exchange for AmSouth recommending to the trustees that BISYS provide securities lending services to the AmSouth Funds, BISYS would rebate some of the fees it charged the funds for securities lending back to AmSouth in the guise of consulting fees. Under this consulting agreement, AmSouth purportedly provided general marketing advice to BISYS to market AmSouth’s own funds. AmSouth received $1.161 million in total consulting fees. Neither the existence of side and consulting agreements nor the terms of these agreements were disclosed to the AmSouth Funds’ independent trustees or to the Funds’ shareholders.
In settling the Commission’s charges, AmSouth Asset Management agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Investment Advisers Act, and AmSouth Bank and AmSouth Asset Management agreed to cease and desist from committing or causing any violations and any future violations of Sections 12(b) and 34(b) of the Investment Company Act and Rule 12b-1 thereunder. AmSouth agreed to pay a total of $11.4 million, consisting of disgorgement of $7.7 million in ill-gotten gains, prejudgment interest of $2.2 million, and a $1.5 million penalty.
AmSouth Bank and AmSouth Asset Management consented to the issuance of the order without admitting or denying any of the findings.
The Commission’s investigation is continuing.