On May 2, 2017, the SEC announced settled administrative proceedings against Calvert Investment Management, Inc., a registered investment adviser (Calvert Management), and Calvert Investment Distributors, Inc., a registered broker-dealer affiliated with Calvert Management (Calvert Distributors) (together, Calvert), for (1) improperly using the assets of Calvert-advised mutual funds (the Funds) to pay for the distribution and marketing of Fund shares outside of the Funds' Rule 12b-1 plans, and (2) causing the Funds to incur expenses for sub-transfer agent services (sub-TA) in excess of the Funds' established expense limits. The SEC order also states that the Funds' prospectuses contained material misstatements concerning the Funds' payments for distribution-related services. In addition, the SEC alleged that in certain periodic reports provided by Calvert to the Funds' boards of trustees and directors egarding payments for distribution and sub-TA services, Calvert inaccurately disclosed that the fees paid for distribution and marketing services were sub-TA fees.
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder make it unlawful for any registered open-end fund to engage "directly or indirectly in financing any activity which is primarily intended to result in the sale of shares issued by such company" unless such financing is made pursuant to a written plan that meets the requirements of Rule 12b-1. Consequently, as noted in the SEC order, if there is no approved Rule 12b-1 plan that permits the fund's adviser to use fund assets to pay for distribution, then fund assets cannot be used to pay for such distribution. The adviser, however, may pay for those distribution services out of its own resources.
The SEC order also notes that, in addition to providing distribution services, intermediaries often provide shareholder services that typically would otherwise be provided by the fund's transfer agent. These services are commonly referred to as "sub-TA services" and are often paid out of the fund's assets. According to the SEC, the agreements between the Funds and Calvert provided that the Funds were not to incur expenses related to sub-TA services in excess of 30 basis points annually.
The order states that although certain of Calvert Distributors' agreements with intermediaries, such as its agreements with "Intermediary A and Intermediary B," called for the provision of distribution and marketing services, from January 1, 2008 through December 31, 2014 (the Relevant Period), Calvert treated those agreements as being for sub-TA services, and improperly caused the Funds to pay approximately $14.87 million for those services outside of a Rule 12b-1 plan. The SEC also alleged that over the same period of time Calvert improperly caused the Funds to pay intermediaries approximately $2.96 million for sub-TA services in excess of the annual 30 basis point expense limitation. According to the order, both of these categories of improper payments were in addition to payments made to the intermediaries pursuant to the Funds' written Rule 12b-1 plans.
Pursuant to the order, Calvert agreed to pay approximately $17.8 million in disgorgement and $3.8 million in interest, in addition to a civil monetary penalty of $1 million. The order notes that the penalty was reduced based on Calvert's self-reporting of the improper fee payments, cooperation with the SEC's investigation and prompt remediation, including the implementation of enhanced policies and procedures regarding payments for distribution and sub-TA services.
The SEC order is available at: https://www.sec.gov/litigation/admin/2017/ia-4696.pdf.