And with a yawn one of the last great “scandals” of the post-bubble concludes. Today, an NASD Hearing Panel fined American Funds Distributors, “the principal underwriter and distributor of the shares of the American Fund family” (as the NASD describes AFD), for directed brokerage.

Directed brokerage was the practice of fund companies executing trades via a retail-brokerage trading desk as a reward for the broker/dealers’ reps selling its funds. Fund companies agreed to “direct” trades based on a sales formula. For example, the NASD Hearing Panel says that American Funds’ parent, the Capital Research and Management Company (CRMC), paid the top 50 largest-selling b/ds of American Funds a sum equal to about 10 to 15 basis points of each firm’s prior year sales. That amounted to almost $100 million from 2001 to 2003, a period chosen for convenience, the hearing panel wrote in its decision.

For this, AFD and CRMC was in violation of the Anti-Reciprocal Rule and fined $5 million. According to the NASD’s press release, “…the panel rejected NASD Enforcement’s arguments that AFD engaged in a pattern of misconduct over a period of years that was intentional or at least reckless. It noted that AFD’s use of directed brokerage was consistent with practices that had arisen in the mutual fund industry over a number of years, that regulators did not express concern about those practices until 2001, and that, unlike its competitors, AFD acted voluntarily to change those practices when regulators began expressing those concerns.”

But, was directed brokerage illegal or not? A 1973 rule seems to show clearly that it was, but in the early 1980s other rules were adopted that seemed to dampen the illegality. Yet, the NASD panel ruled that American Funds’ was guilty of violating Rule 2830(k)(3). [For more on the specifics, read the panel’s decision here.] American Funds and its parent basically argued that the rule didn’t prohibit such practices, and, anyway, regulators knew everyone was doing it. For more, see last year's Ten to Watch report, Learning to Live With the New Normal.

Roy Weitz, considered an industry gadfly for his watchdog site, Fund Alarm, says, “The rule was murky, for sure.” The NASD amended those rules to prohibit directed brokerage in 2005. So, Weitz sees the announcement as something of a yawner. “It’s symbolic. It’s important to bring the big guy down to say, ‘Hey, if we’re going to punish American Funds—the big guy—we’ll get you too.’ ”

American Funds’ penalty is $2 million less than that paid by ING’s four b/ds, which were fined on Aug. 10. But it’s far less than the $50 million paid by Morgan Stanley in 2003. (Many mutual fund families and b/ds have been fined for the activity.)

“Five million?” asked a source at a rival fund family, “They must be thrilled.” Besides, says the source, no investors were harmed by these arrangements. “Look, you can’t buy business at these big firms. But is the world a better place without directed brokerage? Sure. The business is cleaner without it. Clearly, a conflict of interest was there.”

One broker at a regional firm says that most advisors weren’t even aware of these arrangements. “Would a rep put a client in a fund against his will because his firm said, ‘Hey, we need some more American Funds tickets from you this month?’ Clearly not,’ ” he adds. And, it’s ironic, the advisor says, since during the 2001 to 2003 time period American Funds was the top asset gatherer in the country. At that time, advisors were going for solid fund families with good results and moderate fees. “I could see going after a lousy firm, but American Funds is a great company.”