WASHINGTON - For the second time in a year, the Securities and Exchange Commission Friday fired a warning shot at investment advisers for failing to correctly value tax-exempt bonds held by money market funds.

The SEC's message was delivered as it reached a settlement with the Bank of California on charges that the bank failed to account for a significant drop in the market price of multifamily housing bonds held by one of its money market fund clients and backed by Mutual Benefit Life Insurance Company of Newark, N.J.

The bank agreed to an SEC "cease and desist order," a procedure that bars it from future wrongdoing but does not necessarily involve a fine. The bank neither admitted nor dented the charges.

In the earlier case, USAA Investment Management Co. agreed in January to bay a $50,000 fine to settle SEC charges that it violated the Investment Company Act by improperly valuing over $177 million in tax-exempt securities bought by its client, the USAA Tax Exempt Fund Inc.

The Bank of California is accountant and investment adviser to the HighMark Group, which in October 1990 purchased $1 million in bonds issued by the Industrial Redevelopment Authority of the city of Phoenix for one of the group's eight money market portfolios, the Tax-Free Fund.

Mutual Benefit was seized by the New Jersey Insurance Commission in July 1991 when it financially collapsed and was unable to honor its guarantee on the Phoenix bonds.

The SEC charged that despite the drop in the bonds' market price, the Bank of California failed to change its accounting procedures as required by SEC rules when there is a deviation of over 1/2 of 1% between the amortized cost and the market price of securities.

Rule 2a-7 of the Investment Company Act generally requires firms to mark a portfolio to market on a daily basis if there is such a deviation.

The bank carried the bonds for five weeks without properly pricing them to market despite their decline of 3/5 of 1%, the SEC said in its seven-page administrative proceeding against the Bank of California.

"As a result, during the period between July 25, 1991, and August 28, 1991, over 20 million shares were redeemed by the fund at an inflated value, which diluted the value of the remaining shareholders' assets," the SEC charged.

The SEC conceded that the bank's pricing error was primarily caused by an employee in the bank's fund accounting department. Nevertheless, the bank's internal controls should have detected the pricing problem, which festered for weeks, the SEC said.

"The bank's system allowed the same individual who rcceived the market value 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 SEC charged.

Christine Stuart, vice president and manager of communications for Bank of California, said the accounting error was caused by an "unlikely set of circumstances, which included a clerical coding error and failure by an employee to follow well-established procedures and policies."

"When this was discovered, immediate corrective action was taken," Stuart said. Regulators were notified and the bonds were bought out of the tax-free fund's portfolio so that the fund was made whole and no investor incurred a loss," said Stuart, whose bank manages over $6 billion in assets.

Securities and Exchange Commission member Richard Roberts said, "The commission expects all money market funds and their advisers, whether taxable or tax-exempt, to comply with the ... Investment Company Act. Failure to do so may draw the attention of the commission's enforcement staff."

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