Franklin Resources today announced its Franklin Advisors and Franklin Templeton Distributors subsidiaries agreed to pay $10 million in penalties each to settle charges that they used fund assets to pay brokerage firms for recommending Franklin Templeton mutual funds. As part of the settlement, the subsidiaries also will pay $1 in reimbursement to investors, as well as undergo certain compliance reforms, according to a SEC news release.
Between 2001 and 2003, Franklin Templeton Distributors had "shelf space" agreements with 39 broker-dealers and allocated $52 million from brokerage commissions to pay those firms marketing its mutual funds, the SEC said. Franklin did not "adequately disclose" these agreements to the fund boards or fund shareholders, according to the SEC.
Using commissions to pay for shelf space also created a conflict of interest between Franklin Advisors and the funds. "Mutual funds that follow this practice ... have an incentive to do their fund portfolio trading through brokerage firms that might not be the best choice for fund shareholders," the SEC said, noting that Franklin Advisors did not disclose the arrangements to the fund boards and shareholders.
The two Franklin subsidiaries neither admitted nor denied the allegations.
Compliance reform measures for Franklin include retaining an independent distribution consultant to develop a plan for paying the penalty ordered, and appointing an employee to create and implement policies governing shelf space.
Franklin Resources it "believes that settlement of this matter was in the best interest of the Company and its fund shareholders," according to a press release. Lisa Gallegos, Franklin Resources spokeswoman, said the company would not comment further.