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Rating:American Funds, Cali AG End Litigation Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, March 10, 2008

American Funds, Cali AG End Litigation

Reported by Erin Kello

The standoff between California attorney general's office and Capital Research and Management Company, adviser to the American Funds, finally came to an end last month.

In 2005, then attorney general Bill Lockyer, filed a lawsuit alleging that Capital Research violated antifraud provisions of California’s Corporate Securities Law by not adequately disclosing its broker compensation practices.

Lockyer filed the suit at the time of the Spitzer suits. Spitzer later rode those suits to the governor's mansion.

Edmund "Jerry" Brown, now the attorney general, has already been governor of California and a contender for the democratic presidential nomination, giving him no reason to continue to play politics with the suit.

Lockyer is still active in California politics and is currently running for California State Treasurer.

Capital Research still got stuck with the tab for Lockyer's ambitions, though. It will have to shell out $2.5 million to cover the costs of the attorney general’s lawsuit and investigation.

Below is a release issued by Brown on February 15.

Company Press Release

Los Angeles--California Attorney General Edmund G. Brown Jr. and Capital Research and Management Company, the investment adviser to the American Funds family of mutual funds, today entered into an agreement to withdraw their three-year-old lawsuits against each other involving disclosure of broker compensation practices, sometimes referred to as “revenue-sharing.”

Revenue-sharing refers to mutual funds paying extra cash to brokers in exchange for having the fund placed on preferred or recommended lists and receiving heightened visibility within the broker’s sales system. In 2005, the attorney general’s office filed a lawsuit alleging that Capital Research violated antifraud provisions of California’s Corporate Securities Law by not adequately disclosing its broker compensation practices.

“This agreement ends all litigation between the attorney general’s office and Capital Research,” Attorney General Brown said.

Under today’s agreement, the attorney general notes that American Funds and other fund families have improved disclosure of their broker compensation practices and have taken other voluntary measures. These developments have resolved the state’s concerns. Among the voluntary measures are the following:

• Capital Research waived 10 percent of its management fees, saving shareholders an aggregate of approximately $1 billion
• Capital Research has improved its corporate governance practices and internal supervision of its sales staff
• Capital Research eliminated the practice of directed brokerage and will add disclosures regarding revenue sharing practices to all its prospectuses.

The agreement notes that American Funds’ investors currently enjoy among the lowest expenses in the mutual fund industry. The agreement notes that investigations by the California attorney general, the Securities and Exchange Commission and other regulators have resulted in positive changes in the mutual fund industry that have benefited shareholders. Some of the improvements include:

• Repeal of the federal rules that permitted funds to utilize directed brokerage
• Adoption of rules that clarify the use of brokerage to pay for research services
• Improved disclosure by fund companies of their revenue-sharing arrangements
• Improved disclosure regarding board approval of investment advisory contracts
• Disclosure of fund expense ratios in advertising.

Capital Research is also promoting use of the Internet for delivering fund prospectuses and annual reports to reduce the use of printed documents, potentially saving shareholders up to $20 million by slashing printing and delivery costs. Capital Research will reimburse the Attorney General’s office for $2.5 million in costs and attorneys’ fees associated with the attorney general’s lawsuit and investigation.

“Neither California taxpayers, nor investors in American Funds, will bear the costs of these lawsuits and investigations,” said Brown.

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