The Securities and Exchange Commission is charging First Eagle Investment Management and its distribution arm FEF Distributors with improperly using the assets of mutual fund shareholders to pay two broker-dealers to market and distribute its funds. To settle the charges, both entities will pay $40 million, which will go toward repaying shareholders that were impacted. The SEC said the violations took place from 1/08 to 3/14.
While it is typical for mutual fund managers to pay money to brokerage firms and other financial intermediaries to get funds placement on platforms and distribution through financial advisers, the payments are only allowed to come from the assets of an actual fund if they are part of a 12-1b plan that involves apprising shareholders and fund boards of such payments. Also, while funds are allowed to pay broker-dealers for services rendered, again they can only come out of a fund’s assets for said services and not for access to a brokerage firm’s clients.
The SEC has been looking into whether funds are being illegally paid to broker-dealers under the pretense that their money was going toward other services. The regulator’s efforts are related to its Distribution-in-Guise Initiative, which involves investigating whether certain mutual fund advisers are using fund assets improperly by disguising distribution payments as sub-transfer agency payments. The Commission contends that First Eagle and FEF distributors illegally caused the asset managers to pay close to $25 million for services that were related to distribution as opposed to using its own assets to pay firms for this access.
According to the SEC, mutual fund advisers have a fiduciary obligation to properly deal with conflict involving fund distribution and First Eagle breached that duty when it used the assets of the fund instead of its own money while failing to give the funds’ boards accurate data about the fund payments. Instead, said the SEC, the boards were told that the fees were going toward accounting services. Offering documents for the funds also inaccurately noted that the firm was paying for distribution funds out of its own pocket.
When settling, First Eagle said that it “promptly” fixed the issue and offered to give back the money it had used from the funds’ assets right away. The firm admitted that it regretted that this had been a problem and it has since enhanced its procedures and policies.
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Read the SEC Order (PDF)