Fund fee arrangements have been in the crosshairs of the SEC's Enforcement Division Asset Management Unit, which has just settled an interesting case with Morgan Stanley Investment Management, which will pay $3.3 million.

The SEC charges that Morgan Stanley--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."

This may have been a case of easy money. The ostensible sub-advisor apparently did nothing except produce two monthly reports based on publicly available information that MSIM never used.

"Furthermore, MSIM's oversight and involvement with [the sub-advisor] 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" the sub-advisor.

If the money is that easy, it's usually too good to be true. The issue here, as the SEC focuses on fund fee issues, is whether this practice is rife. It's hard to believe a fund would not know that no services were flowing from a large contract. The fund board has to bear some of the blame for this as well.

For more:
- here's the release

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