A mutual fund sponsor agreed to pay $40 Million in disgorgement, fines, and interest for using fund assets to pay for distribution services without approval by the Board or shareholders. The SEC charges the respondent with mis-characterizing distribution payments as sub-Transfer Agent services such as recordkeeping and other shareholder servicing. Instead, the Agreements with two broker-dealers specifically required payment for distribution and marketing services based on a percentage of assets sold. The SEC indicates that such payments could only be made out of the adviser’s assets or pursuant to a 12b-1 plan approved by the Board and shareholders. The SEC charges the respondent with making misleading statements to both the Board and to shareholders in the prospectus. The SEC has indicated that this is the first case brought under its Distribution-in-Guise Initiative that seeks “to determine whether some mutual fund advisers are improperly using fund assets to pay for distribution by masking the payments as subtransfer agency (subTA) payments.”
OUR TAKE: From an SEC enforcement perspective, this was a “good” set of facts because the intermediary agreements specifically said that the payments were for distribution. The more difficult question is whether the SEC will seek to re-characterize documented shareholder servicing or sub-TA payments as disguised distribution payments based on a calculation of benefits derived or actual activities undertaken.