The SEC charged Morgan Stanley Investment Management (MSIM) with violating securities laws for a fee arrangement with The Malaysia Fund. For over a decade, MSIM represented to the fund's board and investors that a Malaysian sub-adviser was providing advisory services, when in fact it was not. As a result, the fund and its investors paid over $1.8 million in improper fees to the sub-adviser. To settle the charges, MSIM agreed to repay the fund, pay a $1.5 million penalty, and implement new compliance procedures.

1. SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement; 2011-244; November 16, 2011
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SEC Charges Morgan Stanley Investment Management
for Improper Fee Arrangement
FOR IMMEDIATE RELEASE
2011-244
Washington, D.C., Nov. 16, 2011 — The Securities and Exchange
Commission today charged Morgan Stanley Investment Management (MSIM)
with violating securities laws in a fee arrangement that repeatedly charged
a fund and its investors for advisory services they weren’t actually receiving
from a third party.
Additional Materials
SEC Order Against MSIM
SEC Order Granting a Waiver of the Disqualification Provision
SEC Order Granting Waivers of the Disqualification Provisions
The SEC’s Enforcement Division Asset Management Unit has been focused
on fee arrangements with registered funds. The SEC’s investigation found
that MSIM — the primary investment adviser to The Malaysia Fund —
represented to investors and the fund’s board of directors that it contracted
a Malaysian-based sub-adviser to provide advice, research and assistance
to MSIM for the benefit of the fund, which invests in equity securities of
Malaysian companies. The sub-adviser did not provide these purported
advisory services, yet the fund’s board annually renewed the contract based
on MSIM’s representations for more than a decade at a total cost of $1.845
million to investors.
MSIM agreed to pay more than $3.3 million to settle the SEC’s charges.
The SEC’s Asset Management Unit has an initiative inquiring into the
investment advisory contract renewal process and fee arrangements in the
fund industry.
“We want to take the advisory fee setting process out of the shadows by
scrutinizing the role of investment advisers and fund board members in
vetting fee arrangements with registered funds,” said Robert Khuzami,
Director of the SEC’s Division of Enforcement.
According to the SEC’s order instituting the settled administrative
proceedings, The Malaysia Fund’s board of directors evaluated and approved
the sub-adviser fees each year from 1996 to 2007 based on MSIM’s
representations during what’s known as the “15(c) process.” Section 15(c)
of the Investment Company Act requires an investment adviser to provide a
fund’s board with information that is reasonably necessary to evaluate the
terms of any contract whereby a person undertakes regularly to serve as an
investment adviser of a registered investment company.
“MSIM failed in its duty to provide the fund’s board members with the
information they needed to fulfill their significant responsibility of reviewing
and approving the sub-adviser’s contract,” said Bruce Karpati, Co-Chief of
the SEC Enforcement Division’s Asset Management Unit. “MSIM’s failure
undermined the integrity of the board’s oversight process.”
http://www.sec.gov/news/press/2011/2011-244.htm[28-12-2011 19:57:47]

2. SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement; 2011-244; November 16, 2011
According to the SEC’s order, MSIM arranged The Malaysia Fund’s sub-
advisory agreement with a subsidiary of AM Bank Group, one of the largest
banking groups in Malaysia. Despite the research and advisory agreement
stating that the AM Bank Group subsidiary (AMMB) would provide MSIM
with “investment advice, research and assistance, as [MSIM] shall from
time to time reasonably request,” the SEC found that AMMB merely
provided two monthly reports based on publicly available information that
MSIM neither requested nor used in its management of the fund.
Furthermore, MSIM’s oversight and involvement with AMMB during the
relevant time period were wholly inadequate. MSIM had no written
procedures specifically governing its oversight of sub-advisers, and did not
have a procedure in place for reviewing work done by AMMB.
According to the SEC’s order, MSIM also was responsible for preparing and
filing the fund’s annual and semi-annual reports to shareholders. The fund’s
filings stated that for an advisory fee, AMMB provided MSIM with
“investment advice, research and assistance.” Since AMMB was not
providing any advisory services, MSIM prepared and filed false information
in the annual and semi-annual reports.
“Not only did MSIM’s internal controls fail in allowing this purported services
arrangement to go on, but the firm repeatedly issued reports to investors
that inaccurately represented those services,” said Eric I. Bustillo, Director
of the SEC’s Miami Regional Office. “MSIM clearly lost sight of this sub-
adviser.”
According to the SEC’s order, the fund’s sub-adviser contract with AMMB
was terminated in early 2008 after the SEC’s examination staff inquired into
the fund’s relationship with the sub-adviser.
The SEC’s order finds that MSIM willfully violated Sections 15(c) and 34(b)
of the Investment Company Act and Sections 206(2) and (4) of the
Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder. Without
admitting or denying the SEC’s findings, MSIM agreed to a censure and to
cease and desist from committing or causing any violations and any future
violations of those provisions. MSIM agreed to repay the fund $1.845
million for the sub-adviser’s fees and pay a $1.5 million penalty. MSIM also
agreed to implement policies and procedures specifically governing the
Section 15(c) process and its oversight of service providers.
The SEC’s case was handled by Chad Alan Earnst, Christine Lynch, and
Jessica Weiner, members of the Asset Management Unit in the Miami
Regional Office, and Tonya Tullis, staff accountant. Karen Stevenson, Susan
Schneider, and Dennis Delaney from the SEC’s Washington D.C. office
conducted the related examinations. The SEC acknowledges the assistance
of the Securities Commission of Malaysia and the Monetary Authority of
Singapore.
The SEC’s investigation is continuing.
# # #
For more information about this enforcement action, contact:
Bruce Karpati ( 212-336-0104 ) and Robert Kaplan
( 202-551-4969 )
Co-Chiefs, SEC Enforcement Division’s Asset Management Unit
Glenn S. Gordon
Associate Regional Director, SEC’s Miami Regional Office
305-982-6300
http://www.sec.gov/news/press/2011/2011-244.htm[28-12-2011 19:57:47]

3. SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement; 2011-244; November 16, 2011
Chad Alan Earnst
Assistant Regional Director, Asset Management Unit, SEC’s Miami Regional
Office
305-982-6355
http://www.sec.gov/news/press/2011/2011-244.htm
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