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SEC Announces First “Distribution in Guise” Settlement

In the first settlement from the SEC’s so-called “Distribution in Guise” initiative, First Eagle Investment Management and FEF Distributors (“Distributor”) agreed to pay $40 million to settle charges that they caused the First Eagle Funds to improperly pay for distribution outside of the funds’ 12b-1 plans. The board of trustees was not named in the action. The settlement follows the July 2015 sale of a majority stake in First Eagle Investment Management to private equity firms Blackstone and Corsair Capital.

According to the order, the Distributor invited one intermediary to enter into a “Selected Dealer Agreement” that provided that the intermediary would become a “selected dealer to distribute shares.”  Under the agreement, the intermediary would provide “due diligence, legal review, training, and marketing.”  In exchange, the agreement provided that the fund would pay a one-time fee of $50,000, 25 basis points on new gross sales, and a quarterly payment of 10 basis points on shares held longer than one year, all of which was above and beyond any payments to the intermediary pursuant to a 12b-1 plan. According to the SEC, the funds paid approximately $24.6 million over the period of January 1, 2008 to March 31, 2014 for services that “were generally marketing and distribution, not sub-TA services.”

The Distributor also entered into an agreement with a second intermediary which provided services the SEC again classified as “generally marketing and distribution.” The “Correspondent Marketing Program Participation Agreement” provided that the intermediary would:

(i) provide email distribution lists of correspondent broker-dealers that have requested “sales and marketing concepts” from Intermediary Two; (ii) market the Funds on its internal website; (iii) invite the Funds to participate in special marketing promotions and offerings to correspondent broker-dealers; (iv) invite First Eagle to participate in Intermediary Two’s annual conference; (v) provide quarterly statements detailing which correspondent broker-dealers are selling the Funds; and (vi) waive all trading fees charged to correspondent broker-dealers relating to the Funds.

The contract provided that the funds would pay an annual fee of 5 basis points on the value of the shares sold by the intermediary, amounting to $290,000 for the period of January 1, 2008 to March 31, 2014.

The order notes that these two agreements were “inaccurately included as sub-TA fees” in communications with the board of trustees. According to the order, First Eagle retained outside counsel in 2008 to review its practices with respect to sub-TA fees.  The order states that the resulting report, which was shared with the board, found that the fees paid to the two intermediaries under the contracts at issue were for sub-TA services.

The SEC also found that the payments under the contracts were contrary to the fund’s disclosure, which stated that “[First Eagle Fund] Distributors or its affiliates bear distribution expenses to the extent they are not covered by payments under the [Rule 12b-1] Plans.”  According to the SEC, the agreements in question caused the funds to pay distribution and marketing expenses not covered by the funds’ 12b-1 plans.

As a result of the violations, First Eagle agreed to disgorge $24.9 million and interest of $2.3 million, and First Eagle and the Distributor agreed to pay a civil penalty of $12.5 million. The almost $40 million will be used to reimburse shareholders for fees improperly paid from fund assets, “foregone appreciation,” and interest. In addition, the Distributor agreed to retain an independent consultant to “conduct a comprehensive review of [the distributor’s] supervisory, compliance, and other policies and procedures designed to prevent and detect the prohibited use of the Funds’ assets to engage, directly or indirectly, in financing any activity which is primarily intended to result in the sale of shares issued by the Funds.”

First Eagle released a public statement on the settlement:

“We are pleased to have reached an agreement with the SEC that will allow us to reimburse affected fund shareholders. 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. 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.”