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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

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