American Funds Off the Hook for Direct Brokerage Commissions

American Funds Off the Hook for Direct Brokerage Commissions

americanfundsAfter a six-year-long battle, the Securities and Exchange Commission overruled a FINRA charge against American Funds Distributors that alleged the firm violated its "Anti-Reciprocal Rule." The rule was "designed to prevent quid pro quo arrangements in which brokerage commissions, which are assets of the shareholders of the mutual funds, are used to compensate brokerage firms for selling the funds' shares," according to the FINRA charge. It's surprising that the SEC would come to the mutual fund giant's rescue.

FINRA claimed that American Funds shelled out $100 million in directed commissions to 50 broker/dealers that were the top sellers of its mutual funds. No wonder the firm has climbed to the top of the list of mutual fund families and is now in second place with nearly $1 trillion in assets. (Although, over the last year and change, the fund company has been seeing significant outflows.)

In the appeal decision, the SEC found that under FINRA's rule, the firm should have been put on notice that it was violating the rule.

While firms typically settle these disputes as quickly as possible, American Funds kept fighting the charges til the end. It wouldn't dare jeopardize its reputation, a Morningstar column pointed out:

What's more interesting here is that other firms may have weighed the cost benefit of defending a $5 million claim and decided that it would be easier to pay the fine and move on. Besides, a $5 million fine is a drop in the bucket for a firm like American with nearly $1 trillion in mutual fund assets alone. But, American firmly believed that it had not violated FINRA rules. Plus, American traditionally has had a strong relationship with advisors and investors (despite having suffered roughly $60 billion in outflows over the past 12 months). It's understandable that the firm would vigorously defend itself against the appearance of impropriety, which could undermine that relationship.

American Funds is notorious for staying out of the media spotlight. To me, this is just another example of how the fund family would do anything to maintain its status, its public image, and relationship with advisors. Recently, it seems like the firm has been losing its luster among advisors. And the fact that the SEC defended the firm--that's a coup for them.

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