Fund Adviser/Administrator Settles with SEC Over Alleged Violations of Section 19(a)
[23194]
January 21, 2009
TO: ACCOUNTING/TREASURERS MEMBERS No. 7-09BROKER/DEALER ADVISORY COMMITTEE No. 4-09
CLOSED-END INVESTMENT COMPANY MEMBERS No. 4-09
SEC RULES MEMBERS No. 6-09
SMALL FUNDS MEMBERS No. 5-09
TRANSFER AGENT ADVISORY COMMITTEE No. 6-09 RE: FUND ADVISER/ADMINISTRATOR SETTLES WITH SEC OVER ALLEGED VIOLATIONS OF SECTION 19(A)
The Securities and Exchange Commission has issued an order instituting administrative and cease-and-desist proceedings, making findings, and imposing sanctions against an investment adviser and administrator for a family of closed-end investment companies (“Respondent”). [1] The Order is based on allegations that the Respondent aided and abetted violations by two closed-end funds (“Funds”) of Section 19(a) of the Investment Company Act and Rule 19a-1 thereunder. The Respondent neither admitted nor denied the allegations.
According to the Order, during the period from January 1, 2002 through December 31, 2003, significant portions of all but one of the Funds’ shareholder distributions were from shareholder capital and capital gains, none of which were accompanied by a notice that contained the information required by Rule 19a-1. [2] In addition, the SEC had granted an exemption to the Funds, permitting them to distribute long-term capital gains throughout the year, instead of annually (“managed distribution policies”). In the exemptive application, the Funds represented that they would provide the required Section 19(a) notices to shareholders.
The Order indicates that, pursuant to contracts with the Funds, the Respondent was responsible for the Funds’ administrative operations, which included providing Section 19(a) notices to shareholders of the Funds.
According to the Order, the Respondent knew, or was reckless in not knowing, that the Funds were paying distributions to shareholders from sources other than the Funds’ net income. It noted that the Respondent had received detailed information regarding the Funds’ distributions, including materials showing that these distributions would exceed the Funds’ projected income for the relevant quarter.
The Order also noted that, while the Respondent provided shareholders with a Form 1099-DIV that identified the source of the shareholders’ distributions for the prior calendar year and identified the sources of distributions in shareholder reports, posted on the Respondent’s website, these notices did not comply with Section 19(a) or Rule 19a-1 because they were not made contemporaneously with each distribution.
The SEC found that, based on the alleged conduct, the Respondent willfully aided and abetted and caused the Funds’ violations of Section 19(a) and Rule 19a-1 of the Investment Company Act. Under the Order, the Respondent is required to: (1) cease and desist from causing any violations and any future violations of Section 19(a) and Rule 19a-1; and (2) pay a civil money penalty of $450,000.
Dorothy M. Donohue
Senior Associate Counsel
endnotes
[1] See In the Matter of Gabelli Funds, LLC, SEC Release Nos. IA-2827, IC-28580, Admin. Proc. File No. 3-13332 (January 12, 2009) (“Order”). The Order is available on the SEC’s website at http://www.sec.gov/litigation/admin/2009/ia-2827.pdf.
[2] Section 19(a) of the Investment Company Act of 1940 prohibits investment companies from paying dividends from any source other than accumulated undistributed net income, unless the payment is accompanied by a written statement to shareholders disclosing the source of the payment. Rule 19a-1 specifies that the written statement must be made on a separate paper and clearly indicate what portion of the payment is from: (1) net income; (2) capital gains; or (3) paid-in surplus or other capital source.