SEC Disciplines Adviser for Failure in 15(c) Process

This week, New York Life Investment Management LLC (NYLIM) entered into a settlement with the SEC over charges the adviser failed to provide to the board of a fund advised by NYLIM, Mainstay Equity Index Fund, with information during the 15(c) process and for making false and misleading statements to the SEC in filings. NYLIM entered into a consent settlement, whereby it neither admitted nor denied the SEC's allegations, and agreed to pay disgorgement of $3,950,075, plus $1,350,709 of prejudgment interest, and a penalty of $800,000.

The SEC found that, from March 2002 through June 2004, Mainstay Equity Index Fund's board, including a majority of the independent trustees, approved the renewal of three investment advisory contracts between NYLIM and Mainstay Equity Index Fund. For each contract renewal, or "15(c)" process, the fund's board received information showing that the management fees NYLIM charged to the Equity Index Fund were among the highest of Mainstay Equity Index Fund's peer-group of mutual funds. Mainstay Equity Index Fund has a "Guarantee" feature, under which a NYLIM affiliate, NYLIFE LLC, 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. NYLIM urged the Board of Trustees to consider the 'Guarantee' feature of Mainstay Equity Index Fund in evaluating the management fees NYLIM proposed, but, in violation of Section 206(2) of the Investment Advisers Act of 1940 and Section 15(c) of the Investment Company Act of 1940, failed to provide the board information reasonably necessary to evaluate the cost of the Guarantee feature.

In addition, the SEC found that, 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. Those statements were belied by NYLIM’s repeated assertions during the Section 15(c) meetings in 2002, 2003, and 2004 that its higher management fees were justified by the Guarantee.

The full text of the Commission's order is available at: http://sec.gov/litigation/admin/2009/ia-2883.pdf