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From Securities Regulation Daily, September 21, 2015

Adviser that used mutual fund assets to pay distribution fees fined $40 million

By Amanda Maine, J.D.

The SEC settled proceedings with a mutual fund adviser and its principal underwriter and distributor in its first case brought under its Distribution-in-Guise initiative. The SEC alleged that mutual fund assets were improperly used for distribution and marketing services and passed off as sub-transfer agent expenses. The respondents agreed to pay nearly $40 million in disgorgement, pre-judgment interest, and penalties to settle the matter (In the Matter of First Eagle Investment Management, LLC, Release No. IA-4199, September 21, 2015).

Background. First Eagle Investment Management, LLC is a registered investment adviser for First Eagle Funds (Funds), an open-end diversified investment company. FEF Distributors, LLC, a wholly-owned subsidiary of First Eagle and its principal underwriter and distributor, entered into contracts with two financial intermediaries to provide distribution, marketing, and sub-transfer agent (sub-TA) services to the Funds. According to the SEC, FEF improperly used $25 million of the Funds’ assets to pay for the marketing and distribution of fund shares rather than using FEF’s own resources. The use of mutual fund assets to make distribution-related payments must be made pursuant to a written Rule 12b-1 plan, which must be approved by a fund’s board of trustees.

The SEC alleged that FEF made these distribution-related payments but treated them as though they were for sub-TA services and did not make them pursuant to a Rule 12b-1 plan. In addition, First Eagle told the Funds’ board that these distribution and marketing fees were sub-TA fees. The Funds’ prospectus also inaccurately stated that FEF would be bearing distribution expenses that were not covered by the Funds’ Rule 12b-1 plan, according to the SEC.

Charges and settlement. The SEC’s case is its first arising out of its Distribution-in-Guise Initiative, which seeks to protect mutual fund shareholders from bearing the costs of firms that improperly use fund assets to pay for distribution-related services. The SEC’s order instituting administrative proceedings found that First Eagle violated Investment Advisers Act Section 206(2) and Investment Company Act Section 12(b) and Rule 12b-1. The order also found that First Eagle and FEF caused the Funds to violate those provisions.

To settle the proceedings, First Eagle agreed to pay disgorgement plus pre-judgment interest of $27.2 million and to pay a civil penalty of $12.5 million. First Eagle and FEF agreed to cease and desist from further violations. In addition, FEF agreed to retain an independent compliance consultant to make recommendations and to report to the SEC on its progress towards achieving the recommendations. First Eagle and FEF neither admitted nor denied the SEC’s findings.

The release is No. IA-4199.

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