Now that the baseball season has started, I am starting to believe that there is a link between the steroids problems the sport has been...
Now that the baseball season has started, I am starting to believe that there is a link between the steroids problems the sport has been having and the scandals that have been plaguing the mutual-fund business.
The connection involves the customers, the ones who don’t quite know how to react to seeing their favorite players making headlines.
Some people believe the problems — in baseball and in mutual funds — are overblown, others see overzealous enforcement of rules and others come away disgusted by wealthy players seemingly taking shortcuts in order to gain an edge. And fans — and investors in good funds certainly qualify as such — are left with mixed feelings.
That has never been more evident than in charges that have surfaced over the past two months against the American Funds, the family that has become a darling of consumers and the media for its consistently strong performance, low-cost leadership among load-fund companies and its squeaky-clean image.
Now the American Funds family is dancing with several regulatory agencies. The tune is nowhere near the serious level of the more famous rapid-trading cases that have been at the core of the fund industry’s problems for the past 20 months, and Capital Research and Management, the firm that oversees the funds, seems to have plausible answers for most of the concerns.
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But that doesn’t mean investors aren’t as confused as the average fan upon learning that his favorite home-run hitter has been branded by some as a cheat. A lot of nervous investors have written, wondering whether American Funds’ news means they should switch investing allegiances.
In February, the National Association of Securities Dealers charged the American Funds with breaking something called the “anti-reciprocal rule” by directing $100 million in commissions to the brokerage firms that most aggressively sold the company’s funds from 2001 to 2003.
The regulatory group’s complaint suggests that American Funds didn’t pursue “best execution” — the lowest-cost, or fastest and most efficient completion of a trade — because it directed traders to do business primarily with the firms that pushed the product most heavily. The Securities and Exchange Commission is also looking into American Funds for similar reasons.
The American Funds’ official statement on the issue (available on the www.americanfunds.com Web site) notes that the funds’ distributor — and not the funds themselves — did make additional payments to brokerage firms, but did so in accordance with all federal disclosure rules. And the company does not deny that it was part of the common practice of sharing revenues and even directed brokerage commissions, the latter a practice that was made illegal last year by the SEC.
The company’s position is that it didn’t break the rules here, at least not the ones it believes funds are supposed to be playing under.
The issue may be less about investing with firms untouched by these types of issues than it is investing in specific funds that have not been directly involved. You can still root for the home team, even if an individual player no longer elicits your cheers.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.