Los Angeles-based American Funds, the nation's biggest seller of mutual funds for the last three years, violated securities rules by steering stock trading business to brokerages that pushed its funds to their clients, regulators said Wednesday.
The NASD, the securities industry's self-regulatory body, alleged that American Funds paid $100 million in commissions to about 50 brokerages from 2001 through 2003 for executing stock trades, both "to reward past sales and to encourage future sales" of funds.
American Funds broke rules designed to bar incentives for brokerages to pitch mutual funds to clients in order to reap lucrative fees from a fund company, the NASD said. Its complaint seeks to force American Funds to return "any and all ill-gotten gains."
Capital Group Cos., the mutual fund firm's parent company, denied any wrongdoing and said it would seek to block the action by the NASD, formerly known as the National Assn. of Securities Dealers.
"We have complied fully with both the spirit and the letter of the rule, and we intend to request a hearing before an NASD panel to defend ourselves against these allegations," the company said in a statement.
The NASD's complaint is the first formal action by regulators against American Funds, whose reputation for conservative management, solid investment returns and low fees has helped make it the No. 1 destination for mutual fund money since 2002. With $657 billion in stock and bond assets, American is the third-largest U.S. mutual fund manager, after Fidelity Investments and Vanguard Group.
The $8-trillion mutual fund industry has been under heavy scrutiny by the NASD, the Securities and Exchange Commission and state regulators since New York Atty. Gen. Eliot Spitzer in September 2003 alleged widespread wrongdoing involving often-secret trading deals between fund companies and favored big-money clients.
But the new NASD complaint is a gamble for regulators, some analysts said, because the alleged violations don't involve blatantly illegal practices.
Rather, the charges center on what could come down to technical interpretations of rules governing long-standing practices and relationships in the fund and brokerage businesses.
Some critics say regulators increasingly are telling fund companies that past behavior was improper, even though for years regulators failed to raise objections to the conduct.
