Franklin Settles Case Over Asset Use
Mutual fund giant Franklin Resources Inc. made it official Monday, agreeing to pay $20 million in civil penalties to settle federal charges that it used fund assets to pay for marketing and failed to adequately tell investors or its own fund directors.
The Times reported details of the settlement last month between the San Mateo, Calif.-based firm, which runs the Franklin and Templeton funds, and the Securities and Exchange Commission. Franklin agreed in November to pay $18 million to settle similar charges brought by the California attorney general’s office.
Monday’s settlement, the latest in a series of trading and marketing scandals that have rocked the nation’s $7.6-trillion fund industry, was important for two reasons, said Helane L. Morrison, district administrator of the SEC’s San Francisco office.
“Fund boards need to be fully informed of what the management and distribution companies are doing for them, particularly when what they’re doing creates a potential for conflict of interest,” said Morrison, whose office headed the Franklin probe. “And second, just as the fund boards need to be informed, so do the shareholders.”
Franklin neither admitted nor denied wrongdoing, but said in a statement that it believed “settlement of this matter was in the best interest of the company and its fund shareholders.”
According to the complaint, Franklin Advisers Inc. and Franklin Templeton Distributors Inc., respectively the investment advisor and sales arm for the Franklin Templeton funds, compensated 39 brokerage firms for “shelf space” from 2001 to 2003 without properly disclosing the arrangements.
Mutual funds commonly gain marketing exposure to a brokerage’s clients through so-called shelf space arrangements, paying, for example, for spots on the brokerage’s “preferred list” of funds.
Franklin allocated $52 million in trading commissions to the broker-dealers in exchange for shelf space, the SEC said.
The use of brokerage commissions to compensate brokerage firms for marketing -- a practice that the SEC has since barred -- created a conflict of interest between Franklin Advisers and the funds because the advisor benefited from the added management fees resulting from increased fund sales, but those higher fees were paid by shareholders, the agency said.
In addition to the $20-million penalty, which will be paid to shareholders in the funds, Franklin agreed to pay $1 in disgorgement and to undergo compliance reforms.
Under the Sarbanes-Oxley reforms enacted last year, SEC penalties must be accompanied by at least nominal disgorgement, the agency said. SEC officials said they considered it important to assess a penalty, so they agreed to accept only a token sum in the form of disgorgement.
Franklin shares rose $1.14 to $68.99 on the New York Stock Exchange.
