American Funds, the top company in sales among all U.S. mutual funds over the past 18 months, is quietly talking to a California regulator about the practice of shelf space payouts to broker/dealers to recommend certain funds to investors, Dow Jones reports.

Other fund firms are also being investigated by the regulator, state Attorney General Bill Lockyer, American has not even come close to admitting the arrangements, and even if it were to be formally charged, Morningstar Analyst Kunal Kapoor said the firm will not go down quietly.

"A lot of other funds [in Lockyer’s investigation] have been willing to pay fines to settle regulatory issues, but I wouldn't be altogether surprised if American Funds chose to contest it," Kapoor said. "They put a lot of stock in their reputation."

Included among companies that have settled with Lockyer is Pimco arm PA Distributors, which settled similar charges with the Securities and Exchange Commission as well. Franklin Resources, Inc. is also under investigation, and has said on its Web site that it is negotiating with the attorney general.

While an American spokesman declined comment, a posting on the company Web site says American "does make payments to certain dealers to help defray the cost of educating financial advisers. Various regulators have asked us to provide information about these payments, and we are cooperating fully."

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