The NASD fined American Funds Distributors $5 million on Aug. 30 for violating the NASD anti-reciprocal rule that precludes investment companies from directing trades to brokerage firms in exchange for preferential sales treatment for their funds.
In American Funds case, the firm directed trades to 50 brokerage firms that were top sellers of its products, the NASD charged, paying more than $98 million in trading commissions to the brokers between 2001 and 2003.
The NASD hearing panel concluded that the evidence in this case shows that American Funds Distributors requested and arranged for [parent company] Capital Research and Management to direct brokerage to its 50 leading retail firms conditioned upon their past sales of American Funds. This sort of reciprocal use of mutual fund brokerage is precisely what the rule was intended to proscribe.
Although the NASDs enforcement division recommended that the firm be sanctioned for the full amount of the brokerage commissions, the hearing panel noted that the commissions were actually paid by Capital Research and Management, which the NASD has no jurisdiction over, and said the $5 million fine is very substantial.
American Funds has the right to appeal the decision to the NASD National Adjudicatory Council, or the council itself has the right to question it, within 45 days, and the company has said it plans to appeal.
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