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Another Mutual Fund Firm Fined for Distribution-In-Guise

Another mutual fund manager was censured and penalized ($22.6 Million) for paying distribution and marketing fees mis-characterized as sub-TA fees, in violation of Section 12(b) and Rule 12b-1 of the Investment Company Act.  The SEC alleges that the fund sponsor, through the manager and distributor, used fund assets to pay for distribution but told intermediaries and the Board that such amounts were for sub-TA (shareholder) services and would be paid out of the manager’s revenue rather than fund assets.  Additionally, the SEC charges that, even if the amounts were paid for legitimate sub-TA services, such amounts exceeded the caps set by agreements with the funds.

OUR TAKE: Many in the fund industry were waiting for the regulatory shoe to drop after the SEC first announced the distribution-in-guise sweep two years ago.  This makes 2 cases in 2 days against large fund companies.  Compliance officers must do their own sweep to determine whether fund sponsors are properly compensating intermediaries.

https://www.sec.gov/litigation/admin/2017/ia-4696.pdf

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