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Commission Dismisses NASD Proceeding

American Funds Distributors, Inc., Exchange Act Rel. 64747, June 24, 2011

In an appeal that had been languishing for two years the Commission in a 2-1 vote dismissed NASD proceedings based on allegations that American Funds violated its anti-reciprocal rule. NASD had censured AFD and fined it $5 million.

Two Commissioners (Schapiro and Walter were recused), two (Paredes and Casey) voted to dismiss the proceeding and one (Aguilar) dissented.

AFD had agreed to direct securities transactions and commissions commissions to retail firms selling affiliated mutual funds if certain sales targets were met.

The conduct in question occurred before the rule at issue was substantially amended in 2004.

AFD argued and the Commission agreed that language in the former rule prohibiting directed trading if "conditioned upon" sales was ambiguous. The opinion concludes that given the ambiguity of the rule and lack of previous enforcement action it was unfair for NASD to sanction AFD.

In an effort to rescue some coherence for the order here, footnote 23 claims "we do not intend to suggest that regulatory requirements are enforceable only to the extent the language used precisely delineates each course of conduct that is covered."

Commissioner Aguilar dissented. He noted that AFD's position was that its conduct violated the rule only if there was a binding contractual arrangement to pay directed commissions as opposed to the somewhat vague quid pro quo that the NASD found. He noted that the rule was intended to prohibit such quid pro quo arrangements under any guise.