For the first time in its 74-year history, Capital Group Cos. finds itself in an unusual position defending itself to regulators while trying to hold onto its pristine reputation.
The question being raised is how mutual funds market themselves and whether there are conflicts of interest inherent in the payments funds make to brokers.
Some brokers believe the NASD complaint against Capital’s American Funds Distributors Inc. unit, which gave $100 million in commissions to brokerage firms that aggressively sold its mutual funds from 2001 to 2003, reflect widespread industry practices. Others say the charges are overblown and won’t sully Capital Group’s reputation for high ethical standards.
“They have always been considered a white-shoe company,” said Joe Bogdahn, who runs Bogdahn Consulting LLC in Winter Haven, Fla., a fiduciary advisor to municipal pension plans. “But the SEC is going after the biggest dogs in the pack and they’re the barn with the biggest bull’s eye painted on it.”
Probes by the Securities and Exchange Commission and the NASD (formerly the National Association of Securities Dealers) come at an inopportune time for Capital Group, which is structured as a private stock company owned by its 350 senior partners. The company, based in downtown Los Angeles, has always maintained an aura of secrecy unmatched by any other entity its size.
In the past two years, Capital has been the biggest beneficiary of massive inflows as investors fled scandal-plagued mutual funds such as Putnam Investments, which paid $110 million to settle a 2003 probe by New York Attorney General Eliot Spitzer into late-trading and market timing.
American Funds recorded one of its strongest sales years in 2003, when the first round of mutual fund scandals led to outflows at Putnam, Strong Investments and Janus Capital Group. Of the $183 billion in net inflows in 2003, 26 percent, or $48 billion went to American Funds, according to Financial Research Corp. in Boston.
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The full version of this story
is available in the Feb. 28 edition of the Los Angeles Business Journal.
