## Facts

- Invesco Funds Group, Inc. (IFG) acted as investment adviser to a family of mutual funds; related entities included AIM Advisors, Inc. (adviser) and AIM Distributors, Inc. (principal underwriter/distributor).
- Over multiple years, IFG and AIM Advisors entered into or permitted arrangements allowing selected investors to engage in frequent trading (“market timing”) in certain mutual funds.
- Market timing involved frequent purchases and redemptions intended to profit from short-term pricing inefficiencies.
- IFG permitted preferred market timers to exceed stated exchange limits by a wide margin, with reported aggregate activity on the order of tens of billions of dollars in transactions.
- Some market timers provided “sticky assets” by placing longer-term investments in other funds, increasing advisory fee revenue tied to assets under management.
- Fund prospectuses prepared and used for shareholder disclosure stated that frequent trading was discouraged and generally limited shareholders to four exchanges per fund in a 12-month period, reserving a right to modify or terminate exchange privileges.
- The advisers allowed exceptions for favored timers without a fund-board determination that such deviations were in the best interests of the funds and despite representations that exchange limits would be strictly enforced.
- The SEC found the market-timing activity benefited the timers at the expense of long-term shareholders through dilution and additional transaction and administrative costs borne by the funds.

## Issues

1. Whether permitting undisclosed market-timing arrangements inconsistent with stated fund exchange limits and policies constituted fraudulent or deceptive conduct by registered investment advisers.
2. Whether the arrangements and related disclosure failures violated the Investment Company Act’s restrictions on joint transactions and prohibitions on materially misleading statements in fund documents.
3. What remedies and sanctions were appropriate to address investor harm, conflicts of interest, and deterrence in a settled administrative proceeding.

## Decision

- The SEC instituted and simultaneously settled administrative cease-and-desist proceedings against IFG, AIM Advisors, and AIM Distributors based on market-timing arrangements.
- Without admitting or denying the SEC’s findings, the respondents consented to an order imposing sanctions and undertakings.
- The SEC found that IFG and AIM Advisors violated Investment Advisers Act §§ 206(1) and 206(2) by engaging in fraudulent or deceptive practices tied to undisclosed market-timing arrangements and related conflicts.
- The SEC found violations of the Investment Company Act, including § 17(d) and Rule 17d-1 (prohibited joint arrangements) and § 34(b) (materially false or misleading statements in fund documents).
- The order required IFG to pay $215 million in disgorgement and $110 million in civil penalties, totaling $325 million.
- The SEC established a Fair Fund under Sarbanes-Oxley § 308(a) to distribute monetary relief to affected fund shareholders.
- The SEC imposed cease-and-desist relief and compliance-related undertakings, including retention of an independent distribution consultant to develop and implement a distribution plan.

## Legal Principles

- An investment adviser violates Advisers Act §§ 206(1) and 206(2) when it secretly grants favored investors trading privileges that conflict with disclosed fund policies and fails to provide full and fair disclosure of related conflicts and shareholder harm.
- Allowing select investors to participate in preferential trading arrangements can constitute a prohibited joint arrangement under Investment Company Act § 17(d) and Rule 17d-1 when investors receive a different basis of participation than other shareholders.
- Fund registration statements and prospectuses violate Investment Company Act § 34(b) when they materially misstate or omit how exchange limits and anti–market-timing policies are applied in practice.
- The SEC may require disgorgement, civil penalties, cease-and-desist relief, and undertakings, and may establish a Fair Fund to return monetary relief to injured investors.

## Conclusion

The SEC resolved claims that fund advisers and an affiliated distributor permitted undisclosed market timing contrary to disclosed exchange limits, creating conflicts and harming long-term shareholders; the settlement imposed findings of antifraud and Investment Company Act violations, a $325 million Fair Fund, and structural undertakings to administer restitution and reduce recurrence.


In re Invesco Funds Group, Inc., Investment Company Act Release No. 26629 (Oct. 8, 2004)