NASD announced in a news release that the payments were made to about 50 brokerage firms over a three-year period. The money was paid not only to reward the companies for their past sales activities, but to encourage future sales of the 29 American Funds mutual funds.
NASD’s complaintalleges that, between 2001 and 2003, AFD calculated “target commissions” that it intended to direct to each of the top-selling retailers of American Funds according to a formula that was based on each of the firms’ prior year’s sales of American Funds. AFD communicated to each of these retail firms the specific amount of that firm’s “target commissions” for the upcoming year and the fact that the amount was a function of the firm’s prior year’s sales of American Funds, typically 10 or 15 basis points of those sales.
At the same time, AFD also discussed with the top-selling retail firms the benefits that AFD expected to receive from the sponsorship arrangements, such as including American Funds on the firms’ “preferred fund” or “recommended fund” lists, and enhanced access to the firms’ sales forces.
According to the complaint, at the beginning of each year between 2001 and 2003, AFD provided a chart to the trading desk at AFD’s parent company, Capital Research and Management Company (CRMC). The trading desk directed brokerage commissions on American Funds portfolio transactions to the top-selling retailers on the chart based on the “target commissions” set by AFD for each firm, according to the NASD.
The trading desk also directed brokerage business to retail firms that did not have the capacity to execute securities transactions. Those firms (approximately 30 of the 50 or so) entered into “step out” arrangements with clearing firms in order to receive the directed brokerage commissions, the NASD said.
NASD’s “Anti-Reciprocal Rule,” which first became effective in July 1973, is 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.
AFD is the principal underwriter and distributor of American Funds, the third largest mutual fund family in the US with more than $450 billion in assets and approximately 25 million shareholder accounts.