Franklin Settles 'Shelf Space' SEC Charges
An SEC announcement said Franklin agreed to pay a $20 million penalty and $1 in disgorgement as well as to implement compliance reforms. These monies will be distributed to certain Franklin Templeton funds as part of a plan to be developed by an independent distribution consultant to hired by Franklin.
The Commission’s order found that between 2001 and 2003, the distributor had shelf space agreements with 39 broker-dealers as part of which it allocated $52 million from brokerage commissions in exchange for pushing Franklin funds over others. Franklin did not adequately disclose these agreements to the fund boards or the fund shareholders, regulators charged.
According to the SEC, using brokerage commissions to compensate brokerage firms for marketing created a conflict of interest between the adviser and the funds because the adviser benefited from the increased management fees resulting from increased fund sales. The adviser didn’t adequately disclose the arrangement to the fund boards so they could approve this use of fund assets and to shareholders so they could be informed when making investment decisions. Further, the distributor likewise gained by avoiding paying for shelf space out of its own assets. The distributor had the opportunity to disclose these agreements to the boards but failed to do so, the SEC said.
The compliance measures include appointing an employee to design and implement policies and procedures governing Franklin’s shelf space arrangements.
For its part, Franklin asserted in a statement that “settlement of this matter was in the best interest of the Company and its fund shareholders.”
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