A shareholder of the Franklin Custodian Funds initiated a lawsuit on behalf of the Funds against the trustees of the Funds and the distributor of the Funds (Franklin/Templeton Distributors). The lawsuit alleged that the defendants approved “asset-based compensation” to broker-dealers holding mutual fund shares in a brokerage account, contrary to the Investment Advisers Act of 1940 and a recent D.C. Circuit Court of Appeals case, Financial Planning Association v. SEC.
The plaintiff argued that, under the federal securities laws, broker-dealers may only receive compensation from transactional commissions and may not receive asset-based compensation, unless the broker-dealer is holding the shares in an advisory account subject to the Investment Advisers Act.
This lawsuit was filed in U.S. District Court for the Northern District of California. On June 8, 2010, the Court granted the Motion to Dismiss the case filed by the defendants. Shortly thereafter, the plaintiff amended his Complaint and, on October 22, 2010, the Court again granted the defendants’ Motion to Dismiss the case. The plaintiff has appealed this decision to the Ninth Circuit Court of Appeals. On June 14, 2011, the plaintiff filed a Motion to voluntarily terminate its appeal.