SEC’s division of investment management offers new guidance on “distribution in guise” payments

Abstract

Purpose

To explain the January 6, 2016 written guidance (the “New Guidance”) issued by the Securities and Exchange Commission’s Division of Investment Management on payments made by mutual funds to intermediaries for distribution and non-distribution-related services.

Design/methodology/approach

Explains the SEC’s earlier guidance in the 1998 “Supermarket Letter,” the provisions of Rule 12b-1, the practice termed “distribution in guise,” the emphasis in the “New Guidance” on the role of a fund board’s business judgment, how Rule 12b-1 compliance fits into Rule 38a-1 compliance programs, specific fund activities and arrangements with intermediaries that are of concern to the SEC staff, and the focus of the New Guidance on an adviser’s fiduciary duty to mitigate or eliminate conflicts of interest.

Findings

The New Guidance articulates clear expectations that fund boards will have a process to evaluate the nature of intermediary payments and that fund advisers will provide boards with information in the advisers’ possession that the boards need to carry out that evaluation. Another intent of the New Guidance is apparently to give the SEC a clearer basis to bring enforcement actions concerning the use of fund assets to pay intermediaries for distribution-related activities.

Originality/value

Practical guidance from experienced investment management lawyers.

Citation

Delibert, A., Schneider, L., Clement, M. and Shannon, S. (2016), "SEC’s division of investment management offers new guidance on “distribution in guise” payments", Journal of Investment Compliance, Vol. 17 No. 2, pp. 27-34. https://doi.org/10.1108/JOIC-05-2016-0023