The U.S. Securities and Exchange Commission brought charges against Morgan Stanley Investment Management Wednesday as part of a broader investigation by its enforcement division’s asset management unit into investment fund fee arrangements.

The SEC charged Morgan Stanley Investment Management with violating securities laws for maintaining a fee arrangement that repeatedly charged a fund, and its investors, for advisory services they weren’t actually receiving from a third party, it said Wednesday. Morgan Stanley’s asset management division is paying US$3.3 million to settle the allegations.

The commission said that its asset management unit has an initiative that’s looking into the investment advisory contract renewal process and fee arrangements in the fund industry. “We want to take the advisory fee setting process out of the shadows by scrutinizing the role of investment advisers and fund board members in vetting fee arrangements with registered funds,” said Robert Khuzami, director of the SEC’s enforcement division.

In the case filed today, the SEC said that its investigation found that MSIM, which was the primary investment adviser to The Malaysia Fund, represented to investors and the fund’s board of directors that it contracted a Malaysian-based sub-adviser (a subsidiary of one of the largest banking groups in Malaysia) to provide advice, research and assistance to the firm for the benefit of the fund, which invests in Malaysian equities.

However, the order found that the bank merely provided two monthly reports based on publicly available information that MSIM neither requested nor used in its management of the fund. Nevertheless, the SEC said that the fund’s board annually renewed the contract based on MSIM’s representations for more than a decade at a total cost of US$1.845 million to investors.

The SEC said the sub-adviser contract was terminated in early 2008 after the SEC’s examination staff inquired into the fund’s relationship with the sub-adviser. It also concluded that the bank was not providing any advisory services, and MSIM therefore filed false information in the annual and semi-annual reports.

According to the SEC’s order instituting the settled administrative proceedings, MSIM willfully violated securities laws with the arrangement. Without admitting or denying the SEC’s findings, the firm agreed to a censure and to cease and desist. It also agreed to repay the fund US$1.845 million for the sub-adviser’s fees and pay a US$1.5 million penalty. And, it agreed to implement policies and procedures specifically governing the oversight of service providers.