Fund Times: American Funds Under Fire

The Securities and Exchange Commission is investigating whether American Funds violated its best-execution trading rule by overpaying brokerages for trades as a reward for mutual fund sales, the Los Angeles Times reported Thursday.

American Funds has faced charges of improper practices from a few other securities regulators of late. According to the Los Angeles Times, however, the SEC's case could potentially pose a bigger threat to the company because it could include allegations that American Funds' trading deals penalized its 20 million shareholders. The case could also have broad implications for the mutual fund and brokerage industries.

"Some of the allegations being made are very serious," said Morningstar senior fund analyst Eric Jacobson. "The problem for regulators, however, is that in almost every instance, the regulators themselves offered public comment approving the activity for which they're now targeting American Funds. Some of the accusations, meanwhile, turn on the semantics of disclosure documents. And the most recently publicized SEC investigation turns on defining 'best execution' of trades, which is extremely difficult to pin down."

American Funds is already facing regulatory charges from the National Association of Securities Dealers, which on Feb. 16, 2005, alleged American Funds' distributor violated the 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. According to the NASD complaint, the payments were made to reward the firms for past sales and to encourage future sales of American Funds' 29 mutual funds.

Then, on March 24, California Attorney General Bill Lockyer sued American Funds' distributor and American Funds' advisor, Capital Research & Management Co., over its disclosure of fund-sales practices. Lockyer contends that American Funds failed to adequately disclose about $426 million in payments made to dozens of broker-dealers to sell and recommend American Funds, which is illegal in California, according to Lockyer. The suit seeks disgorgement of all profits the defendants obtained by violating California state law, and its also seeks restitution for investors, as well as civil penalties.

The same day, Capital Research filed suit against Lockyer in Los Angeles Superior Court, requesting that the court rule that it adequately disclosed payments it made to brokers, and that Lockyer doesn't have authority to regulate mutual fund disclosure. 

Investors Scoop up Stock Funds, Shun Money Markets
Investors continue to pile into stock funds and shy away from money market funds, according to data provided by the Investment Company Institute, a Washington, D.C.-based fund-industry trade group. Stock funds posted a $22.4 billion inflow in February compared with net inflow of $10.0 billion in January, the ICI said.

World equity funds (U.S. funds that invest primarily overseas) posted an inflow of $12.0 billion in February, versus an inflow of $8.1 billion in January. Meanwhile, funds that invest primarily in the United States had an inflow of $10.5 billion in February, compared with an inflow of $1.9 billion in January.

The ICI also reported that bond funds had an inflow of $2.3 billion in February, compared with an inflow of $4.6 billion in January. Taxable-bond funds had an inflow of $1.6 billion in February, compared with $3.8 billion in January, while municipal-bond funds had a net inflow of $741 million in February, versus an inflow of $870 million in January.

Fixed-income/equity hybrid funds posted a $4.3 billion net inflow in January, compared with an inflow of $5.3 billion in September.

Money-market funds, meanwhile, had an outflow of $20.1 billion in February, compared with an outflow of $27.5 billion in January.

Management Changes at Transamerica
Transamerica Investment Management announced that several equity-fund managers left the firm on March 31, 2005. These members include Jeffrey Van Harte (who managed  Transamerica Premier Equity , TA IDEX Transamerica Equity ,  Transamerica Premier Balance , TA IDEX Transamerica Balanced (IBALX), and Transamerica Premier Core Equity ), Christopher Bonavico ( Transamerica Premier Focus , Transamerica Premier Index ,  Transamerica Premier Growth Opportunities , TA IDEX Transamerica Growth Opportunities , and AssetMark Small/Mid Cap Growth ) Kenneth Broad (Transamerica Premier Focus, Transamerica Premier Growth Opportunities, TA IDEX Transamerica Growth Opportunities, and AssetMark Small/Mid Cap Growth), and Daniel Prislin (Transamerica Premier Core Equity and Transamerica Premier Focus).

Transamerica said that effective April 1, 2005, Kirk Kim and Ed Han will assume comanagement of the firm's small/mid-growth and multicap strategies. The firm also said Gary Rollé will also be added to the multicap management team.

Scudder Fund Gets a Makeover, New Managers
According to a recent SEC filing, $5-billion  Scudder Growth & Income (SCDGX) is undergoing a makeover. Managers Greg Adams and Andrew Brudenell will be replaced by  head of research Theresa Gusman and the "head of the equity portfolio analytics team for active equity," Gregory Sivin. Per the fund's new mandate, it will become an analyst-driven, "best ideas" fund. Under its former mandate, the fund aimed to replicate the risk profile of the S&P 500 Index, while attempting to beat the bogy through small stock and industry bets. "The new managers will use quantitative risk-control tools, but their approach will likely be less benchmark-sensitive," said Morningstar fund analyst Greg Carlson.

This management change will also affect five Scudder Target funds--Scudder Target 2010 , Scudder Target 2011 , Scudder Target 2012 , Scudder Target 2013 , Scudder Target 2014 --and the two Scudder Retirement funds--Scudder Retirement VI  and Scudder Retirement VII .

Etc.
Putnam announced that effective April 1, 2005, it is lowering the front load on its fixed-income funds' class A shares from 4.50% to 3.75%. Last year Putnam lowered the load on its equity funds from 5.75% to 5.25%.

According to an SEC filing,  Van Kampen High-Yield Municipal (ACTHX) closed to new investors. As market conditions permit, the fund may reopen to new investors, according to the filing. It currently has $4.4 million in assets.

StreetTRACKS Fortune 500 Index   will change its benchmark and name because Fortune Inc. will no longer publish the Fortune 500 Index, according to an SEC filing. The exchange-traded fund will now track the Dow Jones Wilshire 5000 Composite Index and its name will become streetTRACKS Total Market Index, pending shareholder approval of the change in investment objective, the filing said.