Fund Giant’s Profit Rises
Mutual fund giant Franklin Resources Inc. on Thursday set aside $21.5 million toward a potential settlement with regulators over payments to brokerages that sold its fund shares.
While announcing a 32% jump in quarterly profit, San Mateo, Calif.-based Franklin included the charge for an “anticipated settlement” of state and federal probes into payments to brokers for promoting Franklin funds to investors.
Paying brokers for “shelf space” is not illegal, but regulators have questioned whether the payments were adequately disclosed to investors.
“Clearly we are doing our best to resolve these matters,” co-Chief Executive Martin Flanagan told Wall Street analysts.
The Securities and Exchange Commission and the California attorney general’s office are investigating Franklin, the fourth-largest fund company by assets, over shelf space payments, the latest front in the 10-month-old scandal dogging the $7.6-trillion mutual fund industry.
Analysts said Franklin and regulators might settle soon, which could pressure other fund firms to resolve the same issue.
“That clearly is not a good sign for those members of the industry that want to fight,” said Geoff Bobroff, a fund industry consultant in East Greenwich, R.I. “The more cases we get, the more it becomes the weight of precedence.”
MFS Funds is so far the only fund firm to settle with the SEC over shelf space deals, agreeing to a $50-million penalty. Others being investigated by state or federal regulators include Pimco and American Funds.
In February, Franklin was accused by Massachusetts of allowing “market timing” trades in its funds despite officially discouraging them, and the firm is under investigation by the SEC over the same issue. Franklin has denied Massachusetts’ claims, but earlier it set aside $60 million related to timing, which involves the rapid trading of funds to exploit slight price changes.
In the quarter ended June 30, Franklin earned $173.9 million, or 69 cents a share, versus $131.4 million, or 52 cents, a year earlier. Revenue rose to $862.8 million from $683.9 million.
In Thursday’s trading on the New York Stock Exchange, Franklin’s shares fell 61 cents to $48.89.
