American Funds will appear before a panel Monday to fight NASD charges that the mutual fund firm violated regulations by channeling trades to brokerage companies that boosted American Funds, according to the Los Angeles Times.
The Los Angeles- based company is certainly not the first to be accused by the industry regulator of such practices, but is certainly among the few not to quickly end it by agreeing to pay fines, without admission of guilt.
Privately held and Capital Group-owned American Funds argues that representatives "complied fully with both the spirit and the letter" of NASD rules.
NASD representatives declined to comment, according to the Times.
The complaint, filed in February, claims that between 2001 and 2003, American Funds rewarded 50 brokerages that promoted its funds with $100 million "to reward past sales and encourage future sales."
Fund companies were permitted to send some trades to brokerages in exchange for fund sales levels in limited ways, but the Securities and Exchange Commission banned the practice completely in 2004.
The NASD called the American Funds payments "sponsorship programs" and said that they represented "target commissions." The complaint also alleges that American Funds "also discussed with the top-selling retail firms the benefits that [it] expected to receive pursuant to the sponsorship arrangements, such as inclusion of American Funds on the firms' 'preferred fund' or 'recommended fund' lists."
The NASD has filed, and settled, similar complaints with 30 other firms and brokerages in the past few years.
American Funds is countering that its agreements with brokerages were not formal, rather that the company had "internal, informal targets" for awarding trades, a allowed practice under the pre-2004 rules.
Experts say the NASD will need strong evidence to win. Without such undeniable
proof "it's going to be a 'he said, she said' type of routine" at the hearing, Geoff Bobroff, a securities lawyer and head of Bobroff Consulting in East Greenwich, R.I., told the Times.
Defense witnesses will likely testify that American Funds never promised any quid-pro quo, Bobroff said.
The closed-door hearing will start Monday before a three-member panel comprised of two representatives from the securities industry and a professional hearing officer.
Attorney Cheryl Moore, a partner at Dallas-based Patton Boggs, said that because such practices were somewhat allowed in the past, the prosecutions case might be shaky. The NASD has not claimed that any shareholders suffered looses through the alledged agreement, Moore noted.
American Funds is also named in a separate case, filed by Calif. Atty. Gen. Bill Lockyear, which claims the company failed to sufficiently divulge marketing deals it had with various brokerages.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.