$5M Directed-Brokerage Fine vs. American Funds Stands Firm

The Financial Industry Regulatory Authority’s National Adjudicatory Council yesterday upheld FINRA’s 2006 decision to fine American Funds Distributors $5 million for directing traders—worth $98 million in brokerage commissions—between 2001-2003 to 46 broker/dealers that sold its family of 29 mutual funds.

The appeals council found that American Funds sent a large bulk of its trades to those B/Ds that gave preferential treatment to, and were top sellers of, its mutual fund products—including retail brokerage firms without trading capabilities but that could obtain commissions indirectly from American Funds through outside clearing firms associated with the fund complex.

More importantly, the appeals council handed down a harsher sentence than FINRA’s original finding two years ago, in that it maintained American Funds directed these trades intentionally, not through negligence.

That said, the council added that it found no evidence that American Funds was “unjustly enriched, placed unwarranted trades, paid excessive commissions [or that] shareholders were harmed.”