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Thursday, July 30, 2009

12b-1 Fees Land American Funds in Trial

by: Neil Anderson, Managing Editor

The Capital Group 12b-1 fee trial has begun. On Tuesday U.S. District Court Judge Gary Allen Feess began hearing witnesses in Los Angeles for the case In Re American Funds Fee Litigation, more than five years after the suit was first filed. The case strikes at the very nature of 12b-1 fees, alleging that American Funds' 12b-1 fees "were excessive because they were not used for services that benefited the Funds and their investors."

"In theory, 12b-1 fees should be used to grow the funds' size so that the expenses of operating such funds per share are reduced and economies of scale are passed on to investors," the plaintiffs state in their most recent amended complaint. "In practice, however, Defendants' 12b-1 fees were higher than those charged to comparable funds, did not result in economies of scale being passed on to the Funds and did not cause any decrease in the Funds' expenses per share over time."

Capital Group spokeswoman Maura Griffin told the MFWire that the fund firm is "vigorously defending" itself against the suit.

"This has no merit," Griffin said. "We have some of the lowest fees in the industry."

Bloomberg's Edward Pettersson reports that Capital Research & Management chair James Rothernberg testified first on Tuesday, claiming that 12b-1s are "part of the fabric of the business."

The fate of the case rests not in the hands of a jury, but in those of Judge Feess, who threw out a similar case against Capital Group back in February. Meanwhile, the United States Supreme Court is set to hear oral arguments in the fall in an excessive fee suit against Harris Associates, advisor to the Oakmark Funds

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