July 9, 1993
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 24-93
COMPLIANCE COMMITTEE NO. 14-93
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 8-93
SEC RULES MEMBERS NO. 56-93
RE: SEC SANCTION WITH RESPECT TO PRICING ERROR
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The Securities and Exchange Commission recently sanctioned a bank, acting
as fund accountant and adviser, in connection with the alleged miscalculation of
the net asset value per share of a tax-free money market fund. The Commission
found that in 1990 the fund purchased a tax-exempt bond, the principal and
interest of which were guaranteed by an insurance company. In 1991, a state
insurance commission seized the insurance company, which was no longer permitted
to honor the bond guarantee. The state's action resulted in a significant drop
in the bond's market price in mid-July 1991.
The Commission found that in July 1991, the bank's fund accounting
department received a market price less than par for the bond. According to the
Commission, because the price was significantly lower than the previously
reported price of par it was improperly treated as a "transmission error"
although there was no evidence of such an error. The market price was manually
overridden and par value for the bond was allegedly entered on the pricing
worksheet. The pricing problem was uncovered in late August 1991. The bank
informed the fund's board and purchased the bond from the fund at par value plus
interest.
The Commission found that the repeated mispricing of the bond:
was caused by the Bank's failure to have a system of
internal controls sufficient to reasonably prevent one
employee's actions from having such significant
consequences and to alert management in a timely fashion
to the existence of a problem. The Bank's system
allowed the same individual who
received the market values of Fund securities
to price the portfolio and resolve any price deviations.
There was no oversight or review of deviations and their resolution
by senior Bank management.
The Commission also found that the bank's investment advisory records did not
adequately "flag" portfolio securities with credit enhancement features.
Without admitting or denying the allegations, the bank consented to an
order requiring it to permanently cease and desist from committing or causing any
violation of Sections 22(c) and 31(a) of the Investment Company Act and Rules
22c-1 and
31a-1 thereunder.
A copy of the SEC's order is attached.
Thomas M. Selman
Assistant General Counsel
Attachment