The Securities and Exchange Commission has initiated cease-and-desist proceedings against the former board members of five registered investment firms, alleging that they failed to maintain appropriate fair-market valuations of debt securities that comprised a substantial portion of the companies' portfolio.

The case, which dates to 2007, involves debt securities the SEC describes as below-investment grade, including some that were backed by sub-prime mortgages.

Under the SEC's guidance relating to the Investment Company Act, fund directors are obligated to develop a method for calculating fair-market value of those securities, and "to continuously review the appropriateness of the method used" to make those calculations.

In the SEC's order, the commission alleges that the directors tasked a committee with setting the value of the securities, but failed to designate a methodology for their calculations or make any "meaningful effort to learn how fair values were actually being determined."

"They received at best only limited information on the factors considered in making fair value determinations and almost no information explaining why particular fair values were assigned to portfolio securities," the SEC alleges in its order. "These failures were particularly egregious given that fair valued securities made up the majority -- and in most cases upwards of 60% -- of the funds' net asset values."

The five registered investment companies that the SEC names in its complaint are the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund and Morgan Keegan Select Fund.

The funds each maintained a board of directors consisting of two interested members and six independent directors. The independent directors served on the funds' audit committees.

Taken together, the funds had a net asset value of about $3.85 billion as of March 31, 2007, roughly the midpoint of the period described in the SEC's order. The commission describes a significant amount of overlap in the various funds' holdings, with many heavily invested in structured products such as collateralized debt, loan and mortgage obligations and securities backed by home equity loans.

The nature of many of the funds' holdings, described as "subordinated tranches of various securitizations," was such that market quotes were often unavailable, leaving the boards to determine fair-market valuations.

The SEC alleges that the former directors offered only vague guidance for determining the fair-market valuations of the assets, which were set on a day-to-day basis by employees of Morgan Keegan, who "did not use any reasonable analytical method to arrive at fair value," according to the commission's order.

A spokeswoman for Raymond James, which has since acquired Morgan Keegan, declined to comment on the SEC's action, but provided a statement issued by the directors' legal counsel.

"The former independent directors of the Regions Morgan Keegan Funds emphatically deny the allegations against them in the SEC administrative proceeding filed today. They intend to contest this case vigorously, and they are confident that they will ultimately be vindicated," the statement said.