On September 21, 2015, the SEC announced that it had agreed to settle enforcement proceedings brought against an investment adviser and its affiliated distributor for causing mutual funds to violate Section 12(b) of the 1940 Act and Rule 12b-1 thereunder and for the adviser’s violations of Section 206(2) under the Advisers Act. According to the SEC settlement order, the adviser and distributor had caused the funds to make payments to two intermediaries for distribution and marketing services outside of a Rule 12b-1 plan. 

The settlement related to payments to intermediaries under two agreements. The first was a selected dealer agreement (“SDA”) that expressly stated that the distributor had invited the intermediary “to distribute shares” of the funds and under which the funds paid the intermediary for services that expressly included “due diligence, legal review, training, [and] marketing.” Payments under the agreement included a one-time fee and payments based on new gross sales. Notably, the same intermediary had also entered into a separate financial services agreement with the distributor under which the intermediary provided typical sub-TA services, for which the funds paid fees on a per-account basis. The second agreement, a correspondent marketing program participation agreement (“CMPPA”), called for the intermediary to provide a variety of sales-related activities. Critically, payments under the first intermediary’s SDA and the second intermediary’s CMPPA were made outside of the funds’ Rule 12b-1 plan, and were in addition to payments made to the two intermediaries pursuant to the funds’ Rule 12b-1 plan.

The complex’s adviser made reports to the funds’ board regarding payments for distribution and sub-TA services. In the board reports, the distribution fees to the two intermediaries were allegedly inaccurately characterized as sub-TA fees. The funds’ prospectus disclosure regarding distribution expenses stated that the distributor or its affiliates would bear distribution expenses to the extent they are not covered by payments under the Rule 12b-1 plans. In fact, the funds bore the additional distribution and marketing expenses associated with the SDA and CMPPA not covered by the funds’ Rule 12b-1 plans.

As part of the settlement, the adviser agreed to disgorge $25 million and pay $2.3 million in prejudgment interest. In addition, the adviser and the distributor agreed to jointly and severally pay a civil monetary penalty of $12 million.