California and federal securities regulators have abandoned a 3-year-old fight to show that the giant American Funds mutual fund group cheated or misled its investors.
The separate moves by state Atty. Gen. Jerry Brown and by the Securities and Exchange Commission amount to big victories for the Los Angeles-based fund firm, which, with $1.1 trillion in assets, is the nation's largest manager of stock and bond funds.
The 77-year-old company, insisting it had done nothing wrong, had balked at following other fund firms and reaching costly settlements with regulators over similar allegations in recent years.
Brown on Thursday said his office had agreed to drop its case accusing American Funds of failing to properly tell fund shareholders about special marketing-related payments made to brokerages that sold the firm's funds from 2000 to 2004.
Former Atty. Gen. Bill Lockyer, who launched the case in March 2005, had called the payments "kickbacks" designed to induce brokers to sell shares in the company's mutual funds to their clients. He said the company had an obligation to clearly spell out the arrangements to investors so they understood the potential for conflict of interest, and he vowed to seek tens of millions of dollars in restitution.
Brown, in dropping the case, said voluntary measures that American Funds had taken to improve its disclosures to investors had "resolved the state's concerns." Under its accord with the attorney general, the fund firm agreed to include additional language about its brokerage relationships in fund documents beginning March 1.
The agreement also calls for American Funds' parent, Capital Group Cos., to pay $2.5 million to cover the state's legal costs. By contrast, in 2004 two other fund firms -- PA Fund Management, which managed the Pimco-brand stock funds, and Franklin Resources Inc. -- paid the state $9 million and $18 million, respectively, in fines and restitution to settle similar cases by Lockyer.
Capital Group also agreed to drop a lawsuit it filed against the state that accused the attorney general of encroaching on federal regulation of fund companies.
Brown said he was swayed in part by the SEC's decision to drop its probe of American Funds -- a decision that had been rumored last year but had not been publicly disclosed before Thursday. Brown said the SEC's probe ended in October.
An SEC official in Los Angeles declined to comment.
