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Calif. AG Begins Mutual Fund Probe NewsMax.com WiresSACRAMENTO, Calif. -- Attorney General Bill Lockyer launched an investigation Friday into whether three California-based mutual fund companies failed to disclose that they were paying brokers for recommending certain mutual funds. Lockyer wouldn't name the three companies under investigation, but said all were implicated in the Security and Exchange Commission's investigation of Morgan Stanley. The SEC and Morgan Stanley reached a settlement last month in which the company agreed to pay a $50 million fine and change its business practices after allegedly steering clients toward "preferred" mutual funds in exchange for millions of dollars in commission payments from those companies. Franklin Templeton was one of the three companies to receive subpoenas, said Lisa Gallegos, director of corporate communications for the San Mateo-based mutual fund company. She said the company would have no further comment. American Funds also received a subpoena, said Chuck Freadhoff, spokesman for the Los Angeles-based mutual fund company. "It's a broad subpoena, covering our relationships with broker-dealers," he said. The company is cooperating with Lockyer's investigation, Freadhoff said, adding that his company's sales practices are within federal regulations. Lockyer said the state is launching its investigation to ensure that "California investors are able to participate in any restitution and reform." He said a law that went into effect Thursday gave him authority to investigate possible violations of the state's securities law. Previously, only the commissioner of corporations could pursue those cases. "What we're trying to do is make it clear that we're going to aggressively use this new authority on behalf of consumers who were harmed," Lockyer said. The attorney general said he's probing an industry practice of "selling shelf space," which amounts to mutual fund companies buying space on a broker's list of recommended buys. Failure to disclose the arrangement to consumers could violate state law, Lockyer said, and could result in fines, disgorgement of illegal profits or prison sentences. The investigation could expand to include other mutual fund firms, and the brokers who sell mutual funds. Lockyer asked employees of mutual funds or brokers who have knowledge of security law violations to contact his office.
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