The companies that manage and distribute American Funds sued California's attorney general on Thursday, claiming he does not have the jurisdiction to regulate the disclosure of deals with brokers who market its products, Reuters reports.
Attorney General Bill Lockyer countered the motion by filing a lawsuit asserting jurisdiction and alleging that the two companies did not live up to their fiduciary duty to investors by failing to disclose that they paid $426 million in shelf-space payments to broker/dealers.
"American Funds dressed up these arrangements with fancy names like 'execution revenue,' 'target commissions' or 'broker partnership payments,'" Lockyer said. "But when you look beneath the cloak of legitimacy, the payments are little more than kickbacks to buy preferential treatment. Investors deserve to know that. The law American Funds violated is based on that simple principle."
Capital Research & Management and American Funds Distributors argued that that only the federal government has the authority to regulate disclosure of payments made to broker/dealers.
"We fully complied with all regulations and our disclosure met both the letter and spirit of the law, and No. 2, he lacks jurisdiction," said Chuck Freadhoff, a spokesman for the Los Angeles-based companies. 'Federal law preempts state regulation of mutual funds."
According to Lockyer's office, American Funds Distributors had an average of 100 shelf-space arrangements annually with broker/dealers, including Edward D. Jones & Co., Morgan Stanley and Piper Jaffray.
The three firms allegedly provided local sales reps with bonuses and other rewards from shelf-space payments to increases fund sales and did not disclose the incentives to investors.