finra

FINRA

 

For Release:
Contacts:
Wednesday, August 30, 2006
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

 



 

NASD Hearing Panel Fines American Funds Distributors $5 Million for Directed Brokerage Violations

Washington, D.C. — An NASD Hearing Panel ruled today that American Funds Distributors, Inc. (AFD) violated NASD's Anti-Reciprocal Rule by directing brokerage commissions to securities firms that were the top sellers of American Funds mutual funds from 2001 through 2003. The panel censured AFD and imposed a $5 million fine. Today's ruling resolves charges brought by NASD's Department of Enforcement in February 2005.

AFD is the principal underwriter and distributor of American Funds, the second largest mutual fund family in the United States. The directed brokerage commissions - amounting to more than $98 million during the relevant period - were paid by AFD's parent company, Capital Research and Management Company (CRMC), which is also the investment advisor to American Funds.

According to the panel's decision, the "evidence in this case shows…that AFD requested and arranged for CRMC to direct brokerage to its 50 leading retail firms" and that those recommendations were "conditioned upon their past sales of American Funds - indeed, that they were among the top 50 in the prior year's sales - and … the target amount AFD recommended was conditioned upon the specific amount of sales attained by the retailer."

The panel noted that the Anti-Reciprocal Rule was intended to abolish "reciprocal business practices in connection with the distribution of mutual fund shares, i.e., the use of portfolio brokerage of mutual funds to reward broker-dealers for sales of mutual fund shares." Describing AFD's use of brokerage commissions to reward top-selling firms, the panel said, "This sort of reciprocal use of mutual fund brokerage is precisely what the rule was intended to proscribe…A clearer use of directed brokerage to further reciprocal arrangements, contrary to the purpose of (the Anti-Reciprocal Rule), is difficult to imagine."

But the panel rejected NASD Enforcement's arguments that AFD engaged in a pattern of misconduct over a period of years that was intentional or at least reckless. It noted that AFD's use of directed brokerage was consisted with practices that had arisen in the mutual fund industry over a number of years, that regulators did not express concern about those practices until 2001, and that, unlike its competitors, AFD acted voluntarily to change those practices when regulators began expressing those concerns.

"Under these circumstances, the Panel found that AFD's violations while serious, were not egregious."

The panel rejected NASD Enforcement's call for sanctions in the amount of the total directed brokerage payments, noting that the trades were placed and the commissions were actually paid by CRMC - which is not subject to NASD regulation. Emphasizing that the sanctions can only address AFD's misconduct; the panel imposed what it termed "a very substantial fine" of $5 million.

Unless the matter is appealed to NASD's National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel's decision becomes final after 45 days.

A hearing panel consists of an NASD Hearing Officer and two members of the securities industry. The NAC is a 14-person committee composed of seven industry and seven non-industry members that decides appeals from disciplinary, membership and exemptions decisions, rules on statutory disqualification applications, and advises on other policy matters.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms and their employees. For more information, please visit our Web site at www.nasd.com.