Franklin Says State May Take It to Court

Franklin Resources Inc. has warned its mutual fund investors that the state of California may bring a civil action against the industry giant over so-called revenue-sharing payments to brokerages.

The San Mateo, Calif.-based firm previously disclosed it was under investigation, but Wednesday’s disclosure -- made in sales documents provided to investors -- was the first time it said the state was poised to take action. Franklin, which recently agreed to a $50-million settlement with the Securities and Exchange Commission over allegations that it allowed abusive trading by certain fund investors, is being probed jointly by the SEC and the California attorney general’s office over revenue sharing.

Fund companies are not barred from paying sales incentives to brokerages, but regulators say such deals must be adequately disclosed.

Franklin, which in July set aside $21.5 million to cover possible fines or settlements regarding revenue sharing, is not the only fund company being investigated over the practice. The SEC and California also are probing Los Angeles-based Capital Group, which runs American Funds, and Pimco Funds, whose bond operation is based in Newport Beach.