SEC Zeroes in on Best Execution at American Funds

The SEC's investigation into revenue-sharing and directed-brokerage violations at American Funds is now honing in on best execution, sources familiar with the probe told the Los Angeles Times.

While the NASD and California have already charged the nation's top-selling fund company for not properly disclosing its revenue-sharing policies to investors, the SEC's case is potentially far more damaging to the firm and the entire fund industry, according to the Times.

American Funds has vigorously defended itself against the charges, saying all of its marketing policies are strictly within SEC guidelines, which permit directed brokerage as long as a firm achieves best execution. But now, SEC examiners are taking a hard look at American Funds' trades to see whether each was, in fact, a best-execution transaction.

Trading costs are paid out of a fund's assets, which means they are borne by shareholders. If the SEC determines that American Funds violated its best-execution rules, the case could "shake the entire fund industry by raising questions about longstanding sales arrangements between mutual fund companies and brokerages," the Times reports.