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Sept. 21 — First Eagle Investment Management LLC agreed Sept. 21 to pay $40 million to settle SEC allegations that the company illegally used nearly $25 million in fund assets to pay for marketing and distributing fund shares.
The settlement is the first under a Securities and Exchange Commission crackdown on mutual funds using client money, instead of their own assets, to pay for marketing and distribution, which the agency is calling its “Distribution-in-Guise Initiative.”
First Eagle didn't admit or deny the SEC's charges. The firm agreed to reimburse investors for losses, and the overall settlement figure includes $12.5 million in civil penalties.
In a statement, First Eagle said it would improve its internal controls over how its marketing and distribution expenses are funded.
“We are pleased to have reached an agreement with the SEC that will allow us to reimburse affected fund shareholders,” a company statement said. “The SEC has acknowledged First Eagle’s cooperation, noting that we acted promptly to remedy the issue and that we immediately offered to return the money paid from the funds’ assets.”
Section 12(b) of the Investment Company Act and SEC Rule 12b-1 prohibit fund managers from using fund assets for “financing any activity” related to selling fund shares, unless the company's board of directors approves. The rule allows fund managers to pay for marketing and distribution out of their own resources.
The SEC said First Eagle made the improper payments between January 2008 and March 2014.
First Eagle also made inaccurate disclosures to investors and trustees about how its payments were handled, the agency said. As part of the settlement, the company agreed to hire an independent compliance consultant.
“Mutual fund advisers have a fiduciary duty to manage the conflict of interest associated with fund distribution, namely whether to use their own assets or to recommend to their fund’s board to use the fund’s assets to distribute shares,” Julie Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a news release. “First Eagle breached that fiduciary duty by using the funds’ assets rather than its own money to pay for distribution and failed to provide accurate information to the funds’ boards.”
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For the settlement order, visit http://www.sec.gov/litigation/admin/2015/ia-4199.pdf
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