Thursday, August 31, 2006

More Mutual Fund Scandal

NASD Charges American Funds Distributors, Inc. with Arranging $100 Million in Directed Brokerage Commissions for Top Sellers of American Funds

Washington, D.C. -- NASD has charged American Funds Distributors, Inc. (AFD) with violating NASD's Anti-Reciprocal Rule by directing approximately $100 million in brokerage commissions over a three-year period to about 50 brokerage firms that were the top sellers of American Funds. The payments were made to reward the firms for past sales and to encourage future sales of American Funds' 29 mutual funds.

AFD is the principal underwriter and distributor of American Funds, the third largest mutual fund family in the U.S. with more than $450 billion in assets and approximately 25 million shareholder accounts. The commissions were payments for executing trades for the American Funds' portfolio that were directed to the brokerage firms as additional compensation for past sales of American Funds, and to ensure that American Funds would continue to receive preferential treatment at those firms.

I wonder if the commissions charged by these brokers was competitive. We know that fund companies routinely pay higher commissions to brokers in exchange for research; it seems likely that they would be willing to pay higher commissions for sales of the funds too.

Our sole source of revenue is the fee paid by our clients. We don't have any conflicts of interest. If we buy a fund, it's because it's the best fund available.

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