Nothing to See Here: Regulatory Focus on Distribution-in-Guise

February 19, 2016

The following article appeared in the February 2016 edition of NSCP's Currents newsletter was written by Michael Abbriano, Senior Principal Consultant, ACA Compliance Group.


Section 12(b) of the Investment Company Act of 1940 (“IC Act”) generally prohibits a mutual fund from acting as a distributor of its own shares. For the purposes of Section 12(b), acting as a distributor means engaging directly or indirectly in the financing of any activity that is primarily intended to result in the sale of fund shares. Historically, the U.S. Securities and Exchange Commission (“SEC”) has interpreted Section 12(b) as prohibiting the use of a fund’s assets to pay for costs associated with promoting sales of fund shares. The SEC has indicated that it is a conflict of interest for a fund’s investment adviser to recommend that the fund absorb distribution costs that would otherwise be paid for by the adviser, and that such a practice does not benefit existing shareholders.
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