Fund research provider Morningstar Inc. said it is under investigation by the Securities and Exchange Commission related to incorrect total return data that Morningstar published earlier this year for a single mutual fund.
Morningstar disclosed Friday that it received a "Wells Notice" in late May from the SEC enforcement division indicating that the commission was considering civil action against the company for violating U.S. securities laws. The notice gives the company the chance to present facts and arguments against the initiation of a civil action.
Morningstar, which tracks more than 16,000 mutual funds, said it is cooperating with the SEC.
A letter posted to the company's Web site from Morningstar chairman and chief executive Joe Mansueto said that while the company's database originally contained correct returns for the Rock Canyon Top Flight Fund, it received an e-mail in late February from an employee of the fund transfer agent for Rock Canyon asking Morningstar to update the information regarding historical net asset values for the fund, stating that the information wasn't accurate and portrayed the fund 'in a negative manner.'
Mansueto said the transfer agent prepared a table of adjusted NAVs that compensated for the fund's December distribution and forwarded it to Morningstar, which then entered the adjusted NAVs into its database, causing the fund's returns to be overstated.
In March, the fund transfer agent sent a second e-mail to another Morningstar data analyst that said the returns were inflated. After researching the second request to change the data, Morningstar again thought the transfer agent's request was for it to use the adjusted NAVs and left the data as it was. The SEC contacted the company on March 23 to inform it that the return information was wrong, at which point, Mansueto said the company changed the data back to the original, correct data it had reported in the first place.
"We believe the heart of the SEC's concern relates to our timeliness in correcting the data during the nine business days from March 12 to March 23," Mansueto wrote. "We sincerely regret that this error occurred. We recognize our responsibility to investors and take our data quality very seriously."
Mansueto said the company is taking steps to strengthen its quality-control procedures, including increasing its communication efforts and centralizing lines of reporting for data questions or errors; augmenting its business rules; and improving its data analyst training.
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