The National Association of Securities Dealers today charged American Funds Distributors Inc. with violating the NASD’s rule against rewarding brokerages who sell a company’s mutual funds with business, also known as “directed brokerage.”

American is the principal underwriter and distributor of American Funds, the third largest mutual fund family in the U.S. with more than US$450 billion in assets and approximately 25 million shareholder accounts.

NASD alleges American directed about US$100 million in brokerage commissions to about 50 brokerage firms that were the top sellers of American Funds’ mutual funds.

The commissions were payments for executing trades for the American Funds’ portfolio that were directed to the brokerage firms as additional compensation for past sales of American Funds, and to ensure that American Funds would continue to receive preferential treatment at those firms.

The allegations have not been proven. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.

NASD’s complaint alleges that, between 2001 and 2003, American calculated “target commissions” that it intended to direct to each of the top-selling retailers of American Funds according to a formula that was based upon each of the firms’ prior year’s sales of American Funds. American communicated to each of these retail firms the specific amount of that firm’s “target commissions” for the upcoming year and the fact that the amount was a function of the firm’s prior year’s sales of American Funds, typically 10 or 15 basis points of those sales. At the same time, AFD also discussed with the top-selling retail firms the benefits that AFD expected to receive pursuant to the sponsorship arrangements, such as the inclusion of American Funds on the firms’ “preferred fund” or “recommended fund” lists, and enhanced access to the firms’ sales forces.