Fund Company Fined $450,000 for Failing to Provide Closed-End Fund Distribution Notices

The SEC fined a closed-end fund sponsor $450,000 for failing to deliver disclosure statements to shareholders contemporaneous with distributions of capital gains. The SEC alleged violations of Section 19(a) and Rule 19a-1 which prohibits funds from paying distributions from any source other than net income unless accompanied by contemporaneous written statements to shareholders disclosing the source of the distributions. The funds were subject to a managed distribution exemptive order requiring monthly distributions, whether or not coming from net income or capital gain, so long as proper disclosure was provided. The SEC noted that relying on the annual 1099-DIVs and the annual reports, each of which disclosed the sources of distributions, was not sufficient. The SEC charged the fund sponsor because it was contractually responsible for the funds’ administrative operations including distribution notices.

OUR TAKE: Failure to comply with Section 19 used to be a somewhat technical and minor violation. Now, with the breakdown in the money markets, contemporaneous information about the source of distributions (net income vs. capital gain) is critical. The SEC is on the prowl for violators.

http://www.sec.gov/litigation/admin/2009/ia-2827.pdf