FUND ADVISER TO PAY $11 MILLION FOR RECEIVING MARKETING PAYMENTS FROM ADMINISTRATOR

The investment adviser to a mutual fund complex agreed to pay over $11 Million in disgorgement, penalties and interest for failing to disclose marketing payments received from the fund’s administrator. In a side letter to the administration agreement, the fund’s administrator agreed to pay a portion of its compensation back to the adviser in exchange for the adviser recommending a long-term contract to the Board. The money was to be used for marketing purposes, but was used for expenses unrelated to fund marketing. The SEC charged the adviser with filing misleading disclosure documents and misleading the Board during the 12b-1 plan review.

OUR TAKE: Although the SEC framed this case as a disclosure case, full disclosure in the offering documents and the Board may not have avoided liability. Use of fund assets for expenses unrelated to the funds may also be a substantive violation (perhaps under 36(b)), whether or not disclosed.

http://www.sec.gov/litigation/admin/2008/ia-2784.pdf