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SEC Fines First Eagle, Affiliate $40 Million for Improperly Charging Shareholders

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The SEC has fined First Eagle Investment Management and FEF Distributors almost $40 million in the first case brought under its new initiative to protect investors from improperly paying mutual fund distribution fees.

The SEC charged that the firms used fund assets, belonging to shareholders, rather than their own assets to pay distribution costs from January 2008 to March 2014, and the firms agreed to pay the fine. Once collected, those funds will be distributed to the affected shareholders, according to the SEC.

“First Eagle and FEF inappropriately used money belonging to the shareholders of the funds to pay for services clearly intended to market and distribute the shares,” said SEC Director of Enforcement Andrew Ceresney in a statement. “Unless part of a 12b-1 plan, the firm should bear those costs, not the shareholders.” FEF is an affiliated distributor of First Eagle funds.

Julie M. Riewe, co-chief of the Enforcement Division’s Asset Management Unit, explained in the same statement that “mutual fund advisors have a fiduciary duty to manage the conflict of interest associated with fund distribution” and “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.”

First Eagle, a privately held firm with approximately $93 billion in assets under management, said in a statement that it “sincerely regrets” the matter and has “taken steps to strengthen” its policies and procedures in accordance with “core values” that “center around the prudent stewardship of clients’ capital.”

Mutual funds can charge shareholders to pay for distribution and marketing under 12b-1 plans, as Ceresney noted, but FEF was already making payments to two intermediaries for distribution and marketing as part of its 12b-1 plan, according to the SEC. 

The improper fees the SEC cited in this enforcement case were reported to the funds’ boards as sub-transfer agent fees, also known as shareholder servicing fees, when they weren’t.  In addition, the funds’ prospectuses stated that FEF or its affiliates would bear the distribution expenses not covered by the funds’ 12b-1 plans.

The SEC is in the process of reviewing the entire spectrum of funds’ 12b-1 fees, which could mean further enforcement actions like the one announced today against First Eagle, according to Michael Koffler, a former SEC attorney, now partner at Sutherland Asbill & Brennan LLP, where he advises investment funds and advisors and broker-dealers.

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