New scandal.The NASD NASD See: National Association of Securities Dealers NASD See National Association of Securities Dealers (NASD). complaint filed last week against mutual fund giant American Funds  Please see the discussion on the talk page. The allegations against American Funds, a unit of Capital Group Cos., depend in part on details the company gave NASD investigators as part of a review of a practice known as "directed brokerage," which was banned late last year to prevent mutual funds from using brokerage commissions to pay for the distribution of their shares. The NASD claims American Funds paid $100 million in commissions to 50 brokerage firms over a three-year period starting in 2001. At issue is whether the mutual fund firm steered a percentage of stock market trades to brokerage firms that were top sellers of its own funds. American Funds plans to challenge the complaint on the grounds that paying commissions to brokerage firms constitutes a "nonbinding" agreement, according Capital Group spokesman Chuck Freadhoff. The NASD alleges the relationships are a "quid pro quo [Latin, What for what or Something for something.] The mutual consideration that passes between two parties to a contractual agreement, thereby rendering the agreement valid and binding. " arrangement in which brokerage firms are paid commissions to tout Tout To promote a security in order to attract buyers. tout To foster interest in a particular company or security. For example, a broker might tout a security to a client in the hope that the client will purchase the security. some mutual funds over others. The NASD has had an anti-reciprocal rule Anti-Reciprocal Rule A rule created by the National Association of Securities Dealers (NASD) to protect individual investors from conflicts of interest that may arise when brokerage firms and mutual funds collaborate. in place since 1972. Perrie Weiner, national co-chairman of the securities group at law firm DLA Piper DLA Piper (known until 4 September 2006 as DLA Piper Rudnick Gray Cary) is the third largest law firm in the world by number of attorneys after Clifford Chance and Baker & McKenzie. Rudnick Gray Cary, said the NASD complaint has no merit. "This is an indictment indictment (ĭndīt`mənt), in criminal law, formal written accusation naming specific persons and crimes. Persons suspected of crime may be rendered liable to trial by indictment, by presentment, or by information. of the entire mutual fund industry," Weiner said. "There is no rule that I'm aware of that prohibits members of the NASD from considering sales of shares as a factor in the selection of broker-dealers to execute stock trades." The complaint sheds new light on the NASD investigation process and on the practice of kickbacks in the mutual fund industry. Unlike Securities and Exchange Commission investigations into "market timing" and illegal after-hour mutual trades, the NASD complaint does not accuse ac·cuse v. ac·cused, ac·cus·ing, ac·cus·es v.tr. 1. To charge with a shortcoming or error. 2. To charge formally with a wrongdoing. v.intr. American Funds of failing to execute the best trades for its customers. NASD has jurisdiction over American Funds but not over its parent company, Capital Group, the financial advisor that determines which brokerage firms will execute trades. "What they're alleging is that a broker or financial advisor may have had an incentive to put a client in an American fund because the broker's firm expected to gain brokerage business," said Freadhoff. "There was never a quid pro quo." The complaint alleges that American Funds arranged for Capital Group to direct $71 million in commissions to 20 of its top-selling brokerage firms with commissions ranging from $490,000 to $11 million. In addition, the company paid $29 million in "step out" trades to a third-party broker even though the commission ultimately was steered to reward another firm. Those commissions ranged from $112,000 to $5.4 million. In December, American Funds was one of seven mutual fund firms named by brokerage firm Edward Jones Edward, Eddie, or Ed Jones is the name of: Edward Jones:
Edward Jones claimed it received $27.2 million in fees from American Funds in the first 11 months of 2004 to recommend its funds over others. American Funds accounted for more than half of Edward Jones' mutual fund sales last year. |
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