First Eagle Investment Management and FEF Distributors agreed to settle the charges filed by the Securities and Exchange Commission (SEC) for $40 million.
The SEC accused First Eagle and its affiliated distributor of improperly using mutual fund assets to pay for the marketing and distribution of fund shares. The Commission said it would return the money to the accounts of affected shareholders.
The SEC launched that Distribution-in-Guise Initiative to determine whether some mutual fund advisers are improperly using fund assets for distribution by concealing the payments as sub-transfer agency (sub-TA) payments. The charges against First Eagle was the first under this initiative.
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First Eagle violations
The investigation of the SEC found that the firm and its affiliated distributors unlawfully caused the First Eagle Funds to pay almost $25 million for distribution-related services.
The Commission emphasized that First Eagle should only make such payments from fund assets pursuant the written Rule 12b-1 plan approved by its board.
In a statement, Andrew J. Ceresney, director of Enforcement Division at the SEC commented, “First Eagle and FEF inappropriately used money belonging to the shareholders of the funds to pay for services clearly intended to market the funds and distribute their shares. Unless part of a 12b-1 plan, the firm should bear those costs, not the shareholders.”
According to the SEC, FED signed an agreement with two financial intermediaries for distribution and marketing services. First Eagle and FEF treated the agreements as sub-TA services and improperly used the funds’ assets to pay the intermediaries for its services. The payments were in addition to the payments made to the intermediaries pursuant to the Rule 12b-1 plan.
The SEC also found that First Eagle inaccurately reported to the funds’ board that the distribution and marketing fees paid to the intermediaries were sub-TA fees.
Furthermore, the Commission discovered that the prospectus disclosures of First Eagle funds inaccurately indicated that FEF or its affiliates were shouldering the distribution expenses not covered by the Rule12b-1 plan.
Julie M. Riewie, co-chief, SEC Enforcement Division said First Eagle violated its fiduciary duty to manage conflict of interests related to fund distribution and failed to provide accurate information to the funds’ board.
First Eagle comments on the settlement
In a statement, First Eagle said the settlement would allow the firm to reimburse affected fund shareholders. The firm also emphasized that they cooperated with the Commission and acted promptly to resolve the issue by immediately returning the money paid from the funds’ assets.
“We sincerely regret this matter and have taken steps to strengthen our policies and procedures. Our core values center around the prudent stewardship of our clients’ capital, and this extends to ensuring that all our practices meet the highest standards of integrity and accountability,” according to First Eagle.