American Funds Manager Snared in Scandal Probe

June 29, 2004 ( - Capital Research and Management, money manager for the $450-billion American Funds mutual fund group, is apparently being scrutinized for potential directed brokerage violations.

The company had revealed to some of its sales force that it is under investigations by the U.S. Securities and Exchange Commission (SEC), to see if Capital Research rewarded the brokerage firms that aggressively sold its funds by funneling securities commissions to them, the New York Times reported.

Many have alleged that such a practice, known as directed brokerage, is a type of pay-to-play arrangement that can represent a conflict of interest. That problem is that fund managers can direct trades to brokers who sell their funds in a move that puts the manager’s interests – attracting more assets to manage and the fees that come with the assets – ahead of customers.

According to the people briefed on the matter, the SEC has looked back at the commissions that Capital Research paid to conduct its trades and found a strong correlation between the recipients and the brokerage firms selling the largest amounts of Capital Research funds.

The directed brokerage issue is a part of a much wider investigations by state and federal regulators about market timing and late trading as well as certain fund sales practices.

A unit of the Los Angeles-based Capital Group Companies, Capital Research was founded in 1931 and has 25 million shareholder clients. It manages 29 mutual funds and provides money management services to institutional investors. The American Funds, the third-largest fund family in the country, are sold primarily through financial advisers and stockbrokers.

As manager of the American Funds, Capital Research has been the biggest beneficiary of the fund scandal, winning business from investors fleeing other companies, like Putnam Funds and Strong Funds.

For more information about the company’s response to the ongoing fund scandal, go here .