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SEC: Morningstar Inc. may have been slow to fix fund reporting

By Associated Press
Published September 25, 2004

CHICAGO - The Securities and Exchange Commission is investigating the investment research firm Morningstar Inc. for failing to properly correct inaccurate data it published about a mutual fund, the company disclosed Friday.

Morningstar, which rates the performance of mutual funds, received a "Wells Notice" in May saying the SEC might bring a civil action against the company for violations of U.S. securities laws, spokeswoman Margaret Kirch Cohen said.

In a letter to Morningstar customers Friday, Chairman and CEO Joe Mansueto revealed that the investigation relates to total return data Morningstar reported for the Rock Canyon Top Flight Fund in February and early March.

According to Mansueto, Chicago-based Morningstar originally published correct returns for the fund in late February, but changed them after an employee of the fund transfer agent for Rock Canyon Top Flight suggested the listed net asset values, or NAVs, weren't accurate and portrayed the fund in a negative manner.

Morningstar says it now believes an employee from the fund or the transfer agent saw a graph of fund prices on a non-Morningstar Web site that they interpreted as showing the fund's performance dropping.

A second communication from the transfer fund agent informed Morningstar the new Rock Canyon Top Flight numbers were inflated. Mansueto said that communication supplied the same numbers originally published by Morningstar. However, after researching the second request to change the data, Morningstar left the data as it was.

On March 23, the SEC contacted Morningstar, telling officials the return information was wrong, prompting the company to change the data back to the original numbers reported, according to Mansueto.

"We believe the heart of the SEC's concern relates to our timeliness in correcting the data during the nine business days from Mar. 12 to Mar. 23," Mansueto said.

Jonathan Ferrell, manager of Rock Canyon Top Flight, said the real instigators of the problem were a couple of Web sites that reported incorrect numbers from Morningstar.

"I don't feel there was wrongdoing on the part of Morningstar," Ferrell said. "No investors purchased the mutual fund during that time, so it is not like anyone was hurt by this."

Mansueto said Morningstar's data collection process includes more than 200 quality controls, asserting that the company has the highest data accuracy the industry.

"In this case, we believe our collection process worked; we had properly calculated the fund's returns," Mansueto said. "Unfortunately, in an effort to be responsive to the transfer agent's instructions, we overrode our correct returns," he said. "While no data provider can operate with 100 percent accuracy, this always has been, and always will be, our goal."

Morningstar, which reported sales of $139.5-million in 2003, tracks more than 54,000 mutual funds and similar vehicles among over 100,000 investment offerings overall. It has operations in 16 countries. In May, the company filed a registration statement with the SEC for an initial public offering of its common stock.

[Last modified September 25, 2004, 00:59:56]

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