Compliance March 10, 2008

American Funds and California AG End Revenue Sharing Litigation

California’s Attorney General and Capital Research and Management Company, the investment adviser to the American Funds family of mutual funds, have entered into an agreement to withdraw their three-year-old lawsuits against each other involving disclosure of broker revenue sharing agreements.
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A February news release from the office of California Attorney General Edmund G. Brown Jr. said that in 2005, the attorney general’s office filed a lawsuit alleging that Capital Research violated antifraud provisions of California’s Corporate Securities Law by not adequately disclosing its broker compensation practices. Under the agreement, the attorney general notes that American Funds and other fund families have improved disclosure of their broker compensation practices and have taken other voluntary measures, resolving the state’s concerns.

The voluntary measures mentioned in the release include:

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  • Capital Research waived 10% of its management fees, saving shareholders an aggregate of approximately $1 billion;
  • Capital Research has improved its corporate governance practices and internal supervision of its sales staff; and
  • Capital Research eliminated the practice of directed brokerage and will add disclosures regarding revenue sharing practices to all its prospectuses.

Capital Research is also promoting use of the Internet for delivering fund prospectuses and annual reports to reduce the use of printed documents, potentially saving shareholders up to $20 million by slashing printing and delivery costs, Brown noted. The announcement said Capital Research will reimburse the Attorney General’s office for $2.5 million in costs and attorneys’ fees associated with the attorney general’s lawsuit and investigation.

“Neither California taxpayers, nor investors in American Funds, will bear the costs of these lawsuits and investigations,’ said Brown, in the announcement.

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