Capital Research & Management
is finding itself standing in a strange place -- in the floodlights at center stage. The Los Angeles-based advisor to the American Funds is going for total vindication in its fight with the NASD, readying an appeal of a five million dollar fine levied by the NASD as punishment for what the SRO claims was improper use of directed brokerage to reward broker-dealers. The fund advisor claims it did nothing wrong and should not pay the fine.
The fight is likely to be a high profile one and it has already caught coverage in the Wall Street Journal
in an article that was later syndicated to local papers. That publicity provides an ironic twist on the case for Capital Research, a firm known for being publicity shy and focusing all of its branding efforts on brokers. For many years, Capital Research employed a press relations executive whose primary task was to explain to reporters that the firm did not work with the media on coverage.
Staying in the shadows through the directed brokerage fight is proving impossible, something the firm acknowledges.
"We made this decision knowing that we will continue to be in the papers, in the press, but we're not going to say we did something wrong if we didn't just to stay out of the press," Chuck Freadhoff, Capital Research & Management's spokesperson, told the WSJ.
The WSJ's coverage also pointed out that many of the firm's senior executives have spoken out against directed brokerage in the past while they served in public roles. For example, Paul Roye was the top cop enforcing the rules against the practice during the eight years he served as the SEC's director of the Division of Investment Management. Roye is now a senior vice president of the fund business management group at American Funds.
The paper also notes that Paul Haaga, vice chairman of Capital Research, "spoke out strongly against the practice while head of the Investment Company Institute." To give Haaga credit, however, the paper overlooks the subtleties of Haaga's comments. During a press briefing in 2003 the directed brokerage issue became the subject of a heated discussion between reporters, Haaga and Matthew Fink, who was ICI's president at the time.
Haaga stressed to reporters that the use of a fund advisor's own assets to pay commissions was not barred by the NASD rules and that the issue was in the use of the fund's assets. That distinction seemed lost on the reporters in the room.
It seems that Haaga is not giving up in trying to explain the distinction between the two practices.
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