State Nears Accord With Franklin

Times Staff Writer

Mutual fund giant Franklin Resources Inc. is expected to pay a total of $36 million to end state and federal probes into its marketing payments to brokers, regulators said Thursday.

California Atty. Gen. Bill Lockyer said his staff was nearing an $18-million deal with Franklin over the so-called shelf space payments. It would be the state’s second accord with a major mutual fund firm over a controversial practice in which fund companies reward brokers for promoting their products.

The deal could come by Tuesday, according to a person familiar with the matter. Most of the money would be earmarked for fund shareholders.


Franklin also has tentatively agreed to pay slightly more than $18 million to resolve a parallel probe by the Securities and Exchange Commission, another source said. The deal with the SEC is expected to come within the next few weeks.

“We’re very close to resolution,” Lockyer said during a speech in San Francisco. “We waited a number of weeks so the SEC work could be completed. We think it’s important that they see the regulatory agencies are working together.”

Through a spokesman, Lockyer declined to comment further.

For Franklin, the $36 million in settlements would represent less than three weeks of profit, based on the firm’s latest quarterly results. In the second quarter, Franklin set aside $21.5 million to settle government probes into fund sales practices.

Executives at Franklin, which runs the Franklin and Templeton families of mutual funds, would neither confirm nor deny the pending settlements.

“All I know is there continue to be discussions with the regulators on the issue of revenue sharing,” said Lisa Gallegos, a spokeswoman for the San Mateo, Calif.-based fund company.

Revenue sharing refers to payments mutual fund companies make to brokerages to promote their products. The arrangements, also known as shelf-space or pay-to-play deals, might involve paying for placement on a brokerage’s list of preferred funds.

The fact that the practice itself isn’t illegal has led some industry executives to complain that the crackdown is misguided. Regulators, however, say the fund companies haven’t adequately disclosed the arrangements to customers, resulting in hidden conflicts of interest.

Because the payments can boost costs to fund shareholders, Lockyer’s attorneys have said, revenue sharing can hurt investors more than can so-called market timing and illegal late trading, the practices that got the most notice when scandal first rocked the $7.4-trillion U.S. mutual fund business in September 2003.

A settlement with Franklin would mark another victory for Lockyer, who is flexing his clout under a law that took effect Jan. 1 enabling him to bring civil charges of investment fraud. In September, mutual fund group Pimco agreed to pay $20.6 million, including $9 million to California, to settle probes by Lockyer and the SEC into shelf-space payments.

The agreement with Franklin is likely to require increased disclosure of any incentive payments the firm makes to brokers, according to one person with knowledge of the situation.

Lockyer’s lawyers also are investigating Capital Group Cos. of Los Angeles, which runs the American Funds family, over the shelf-space issue, a spokesman for the attorney general’s office said. In addition, the state is investigating several major brokerages that have received marketing payments.

A Capital Group spokesman declined to comment on the matter.

Franklin could be the third fund company to reach a settlement over the shelf-space issue.

MFS Investment Management struck a $50-million deal with the SEC in March. Putnam Investments too is reported to be close to a $40-million settlement with the SEC over undisclosed shelf-space payments.

Among brokerages, Morgan Stanley agreed to pay $50 million to resolve SEC charges related to its Partners Program with 16 mutual fund companies, which made extra payments to be on the brokerage’s list of highlighted funds.

Franklin’s lawyers have been kept busy in recent months by a host of regulators.

In August, Franklin agreed to pay $50 million to settle market timing allegations brought by the SEC. The agency said Franklin let 30 clients make quick in-and-out trades contrary to the funds’ own guidelines.

In September, Franklin agreed to pay $5 million to settle claims by Massachusetts’ securities regulator that it let a favored investor make improper timing trades in its mutual funds. Then Massachusetts lodged a new fraud claim after Franklin said in an SEC filing disclosing the original settlement that it “did not admit or deny engaging in any wrongdoing” -- wording that angered Bill Galvin, secretary of the commonwealth.

With a stock market value of $15.9 billion, Franklin is the largest publicly traded mutual fund company, and with $371 billion in assets it ranks No. 4 in money managed.

Franklin’s shares rose 72 cents to close at $63.99 in New York Stock Exchange trading, which continued after news reports of the California settlement came out at midday.

Times staff writer Walter Hamilton contributed to this report, and Bloomberg News was used in compiling it.