The distributor and investment advisor for the Franklin Templeton family of mutual funds has agreed to pay $20 million to settle charges that they made ill use of brokerage commissions.

The Securities and Exchange Commission alleged that Franklin Advisers and Franklin Templeton Distributors used fund assets to give kickbacks to brokers for recommending Franklin Templeton funds over rival fund groups.

Under the terms of the settlement reached last Monday, Franklin will pay a $20 million civil penalty and another $1 in disgorgement and beef up its compliance efforts. The SEC charged that Franklin Templeton Distributors engineered shelf-space agreements with 39 broker/dealers and sent $52 million in trading commissions to the B/Ds in return for shelf space. Franklin neither admitted nor denied any wrongdoing.

As a result of these clandestine agreements, Franklin Advisers benefited to the tune of increased management fees from new fund sales. The SEC said that Franklin Advisers had a fiduciary obligation to notify the board of trustees in order to seek approval for the use of fund assets, and to fund shareholders, to whom they owe the highest degree of loyalty.

"This settlement reiterates the importance of proper disclosure to the fund boards," said Linda Chatman Thomsen, director of the SEC's division of enforcement. "Franklin's boards did not have sufficient information."

Paying for shelf space has been a longstanding practice in the mutual fund business and has served as a significant catalyst for growth. But as the regulatory noose continues to tighten on mutual fund companies, doing so without notifying shareholders will surely draw the wrath of the Commission.

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