FINRA Fines American Funds
Every rep loves American Funds: The fund family—the nation’s largest, with $1 trillion in assets—offers decent performance for relatively inexpensive fees. Oh, and you won’t get fired for putting clients in an American Fund offering. But today FINRA spanked the fund giant for “directed brokerage,” a now-banned practice of directing trades to the trading desks of top-selling brokerages. (Click here for the FINRA press release and a link to the ruling.)
FINRA let a 2006 case stand that found American Funds Distributors guilty of unfairly compensating brokerages that sold the funds. American will have to pay a $5-million fine. FINRA says American behavior wasn’t “egregious,” and no shareholders were harmed, but that American nevertheless had a conflict of interest with 46 broker/dealers in using directed brokerage. (American paid about $98 million in fees from 2001 to 2003, FINRA says.) It should be noted that directed brokerage was a common practice for years. This was never hidden from regulators, and was sometimes disclosed to investors in prospectuses—well, buried might be a more accurate description of the disclosure. Critics have argued that in outlawing the practice, and then fining fund companies and brokerages for a formerly accepted business practices, regulators are “regulating by enforcement”—or making up rules as they go along. Click here for an L.A. Times story on the L.A.-based fund company.)
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