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American Funds Battles CA Over Broker Kickbacks

The companies that manage and distribute American Funds sued California's attorney general, claiming he does not have the jurisdiction to regulate the disclosure of deals with brokers who market its products.

Attorney General Bill Lockyer countered the motion by filing a lawsuit asserting jurisdiction and alleging that the two companies did not live up to their fiduciary duty to investors by failing to disclose that they paid $426 million in shelf-space payments to broker/dealers.

"American Funds dressed up these arrangements with fancy names like execution revenue,' target commissions' or broker partnership payments,'" Lockyer said. "But when you look beneath the cloak of legitimacy, the payments are little more than kickbacks to buy preferential treatment. Investors deserve to know that. The law American Funds violated is based on that simple principle."

Capital Research & Management and American Funds Distributors argued that only the federal government has the authority to regulate disclosure of payments made to broker/dealers.

"We fully complied with all regulations and our disclosure met both the letter and spirit of the law, and No. 2, he lacks jurisdiction," Chuck Freadhoff, a spokesman for the Los Angeles-based companies, told Reuters. "Federal law preempts state regulation of mutual funds."

According to Lockyer's office, American Funds Distributors had an average of 100 shelf-space arrangements annually with broker/dealers, including Edward Jones, Morgan Stanley and Piper Jaffray.