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Saturday, May 25, 2024 | Back issues
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Trustees Accused of Violating Securities Law

SAN FRANCISCO (CN) - The trustees of Franklin Custodian Funds face a shareholder derivative action accusing them of violating securities law by paying broker-dealers based on the amount of assets in customer accounts.

In a lawsuit filed in Federal Court, shareholder Bradley Smith claims the trust and its underwriter are paying "asset-based compensation" to broker-dealer firms that hold the trust's mutual fund shares in brokerage accounts. He says this violates the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws.

Asset-based compensation refers to payments calculated as a percentage of average daily net value of assets held in customer accounts. Federal securities law restricts broker-dealers to transactional commissions, or payments based on the purchase or sale of securities.

Smith claims that Franklin Custodian Funds uses his shares to make these kinds of illegal payments to Merrill Lynch, "which holds plaintiff's shares of the Trust in a brokerage account, and the payments are financed from daily deductions from the Trust's assets."

On Jan. 8, 2009, Smith says he sent the company board a letter demanding that it to "cease funding" these kinds of payments and to refund past asset-based payments.

The board allegedly denied his request.

He sued the company's 10 trustees and distributor-underwriter Franklin/Templeton Distributors for breach of contract, breach of fiduciary duty and waste.

His attorney is Jeff Westerman of Milberg LLP in Los Angeles.

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