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Fund Company Fined $4.5 Million for Unlawful Distribution-in-Guise

A mutual fund manager agreed to pay a $4.5 Million fine and reimburse the funds another $1.25 Million for making unlawful distribution and sub-transfer agency payments to intermediaries.  The SEC maintains that the fund company claimed to make payments solely out of its revenues but, as a result of a technical misclassification, paid amounts directly out of fund assets in violation of Rule 12b-1.  The SEC also asserts that the respondent paid sub-TA fees in excess of Board-approved caps disclosed in the registration statement.  The SEC charges violations of the antifraud provisions of the Advisers Act and the Investment Company Act (Sections 206(2) and 34(b), respectively) and Section 12(b) and Rule 12b-1 of the Investment Company Act for making distribution payments without proper Board and shareholder approval and disclosure.

OUR TAKE: This the SEC’s second major case pursuant to its distribution-in-guise initiative (See Fund Sponsor to Pay $40 Million for Using Fund Assets to Pay for Distribution).  Fund firms must make sure that sub-TA payments do not include payments for any kind of distribution or marketing services.  Also, Boards must vet and approve all such plans that make use of fund assets.

https://www.sec.gov/litigation/admin/2017/ia-4695.pdf

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