NEW YORK, July 15 (Reuters) - Regions Financial Corp (RF.N) said it may face U.S. Securities and Exchange Commission civil charges over seemingly safe bond mutual funds that lost much of their value because of subprime mortgages and other toxic debt.
The Birmingham, Alabama-based bank said the regulator on July 9 filed "Wells" notices against its Morgan Keegan & Co brokerage and Morgan Asset Management Inc units and against three employees.
A Wells notice indicates SEC staff intends to recommend that civil charges be brought, and gives the recipient a chance to mount a defense. Regions disclosed the notices in a regulatory filing.
Several Morgan Keegan bond funds lost well over half their value in 2007 and early 2008 because of exposure to toxic securities often tied to mortgages, such as collateralized debt obligations, as well as investor redemptions.
One such fund, Select Intermediate Bond A, fell 50.3 percent in 2007, while the Select High Income A fund fell 59.7 percent. Both funds also suffered steep declines in 2008.
Regions previously said the SEC was examining matters addressed in lawsuits by investors who claimed they were misled or not told about the risks posed by the funds' holdings.
"Given the ongoing market conditions affecting securities like these, this is obviously a point of interest for the SEC," Regions spokesman Tim Deighton said. "The funds' unanticipated declines were directly attributable to the cascade of events that has devastated the financial sector."
Regions is defending its practices and cooperating with the SEC to resolve the matter, he said. Morgan Keegan has also faced dozens of arbitration proceedings.
James Kelsoe, who managed many of the funds, admitted in a July 2007 interview with Bloomberg News to an "intoxication" with high-yield subprime investments.
Deighton said Kelsoe no longer manages funds but remains employed at Morgan Asset Management. He declined to say whether Kelsoe received a Wells notice.
Charles Schwab Corp (SCHW.O), Fidelity Investments and Wells Fargo & Co's (WFC.N) Evergreen unit are among other fund providers to face litigation over surprise losses in seemingly safe bond funds.
Morgan Keegan in March received an unrelated Wells notice from the SEC over the sale of auction-rate debt, which became illiquid in February 2008 though many brokerages are alleged to have marketed it as a cash equivalent. Deighton declined to discuss the status of that probe.
Regions shares rose 67 cents to $4.16 in morning trading on the New York Stock Exchange. (Reporting by Jonathan Stempel, editing by Matt Daily and John Wallace)
