________________________ 

 

 

 

 

UNITED STATES OF AMERICA 

Before the
 

SECURITIES AND EXCHANGE COMMISSION 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 2451 / December 1, 2005 

INVESTMENT COMPANY ACT OF 1940 

Release No. 27170 / December 1, 2005 

ADMINISTRATIVE PROCEEDING 

FILE NO. 3-12114 

: 

: ORDER INSTITUTING ADMINISTRATIVE 

In the Matter of : AND CEASE-AND-DESIST PROCEEDINGS, 

: MAKING FINDINGS, AND IMPOSING 

American Express : 

Financial Corporation : 

(now known as Ameriprise : 

Financial, Inc.), : 

: 

Respondent. : 

REMEDIAL SANCTIONS AND A CEASEAND-DESIST ORDER PURSUANT TO 

SECTIONS 203(e) AND 203(k) OF THE 

INVESTMENT ADVISERS ACT OF 1940 

AND SECTIONS 9(b) AND 9(f) OF THE 

INVESTMENT COMPANY ACT OF 1940 

________________________: 

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate and 

in the public interest that public administrative and cease-and-desist proceedings be, and 

hereby are, instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act 

of 1940 (“Advisers Act”) and Sections 9(b) and 9(f) of the Investment Company Act of 

1940 (“Investment Company Act”) against American Express Financial Corporation (now 

known as Ameriprise Financial, Inc.) (“AEFC” or “Respondent”). 

II. 

In anticipation of the institution of these proceedings, Respondent has submitted 

an Offer of Settlement (the “Offer”) which the Commission has determined to accept. 

Solely for the purpose of these proceedings and any other proceedings brought by or on 

behalf of the Commission, or to which the Commission is a party, and without admitting 

or denying the findings herein, except as to the Commission’s jurisdiction over it and the 

subject matter of these proceedings, Respondent consents to the entry of this Order 

Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and 

Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e) 
 

 

and 203(k) of the Advisers Act and Sections 9(b) and 9(f) of the Investment Company 

Act (“Order”), as set forth below. 

III. 

On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

Respondent 

1. AEFC2, now known as Ameriprise Financial, Inc., is a Delaware corporation with 

headquarters located in Minneapolis, MN. AEFC has been registered with the 

Commission as an investment adviser since 1979. Prior to September 30, 2005, AEFC 

was wholly-owned by American Express Company. On October 3, 2005, AEFC became 

a publicly-traded company listed on the New York Stock Exchange as AMP. AEFC 

serves as the investment adviser to its proprietary funds, the American Express Funds 

(“AXP Funds”). 

Background 

2. This matter arises from AEFC’s failure to adequately disclose certain material 

facts to shareholders in the AXP Funds for which it acts as an investment adviser. 

Specifically, AEFC did not adequately disclose to shareholders in the AXP Funds market 

timing activities that were inconsistent with the disclosures in the AXP Funds’ 

prospectuses. 

3. After changing the AXP Funds’ prospectus disclosures, AEFC acted contrary to 

these prospectus disclosures when it allowed certain shareholders to market time the 

mutual funds that it advised. From at least January 1, 2002 to August 31, 2002, AEFC 

allowed certain identified market timers to continue to market time, contrary to the AXP 

Funds’ new prospectus disclosures that indicated that the AXP Funds prohibited market 

timing. From May 2002 to October 2003, AEFC also allowed one identified market 

timer to market time variable annuity products contrary to the variable annuity products’ 

prospectus disclosures. Finally, from January 1, 2002 to September 30, 2003, AEFC 

failed to implement procedures to detect and prevent market timing in 401(k) plans for 

employees of AEFC and related companies or disclose that there were no such 

procedures in place to prevent a number of past and present employees of AEFC and 

related companies from market timing various AXP Funds through their 401(k) 

retirement plans contrary to prospectus disclosures. 

1

 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any 

other person or entity in this or any other proceeding. 

2

 As used herein, the name “AEFC” refers to American Express Financial Corporation and all predecessor 

and successor entities, including Ameriprise Financial, Inc. 

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Improper Market Timing 

4. “Market timing” or “timing” refers to (a) frequent buying and selling of shares of 

the same mutual fund or (b) buying or selling mutual fund shares in order to exploit 

inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm 

other mutual fund shareholders because it can dilute the value of their shares if the 

market timer is exploiting pricing inefficiencies, disrupt the management of the mutual 

fund’s investment portfolio or cause the targeted mutual fund to incur costs borne by 

other shareholders to accommodate frequent buying and selling of shares by the market 

timer. 

5. In January 2002, AEFC changed the disclosures in the AXP Funds’ prospectuses 

to explicitly prohibit market timing. AEFC filed registration statements with the 

Commission that incorporated these new prospectuses. The AXP Funds’ prospectuses 

stated: 

The Fund does not permit market timing. Do not invest in the Fund if you are a 

market timer. 

Excessive trading (market timing) or other abusive short-term trading practices 

may disrupt portfolio management strategies, harm fund performance and 

increase fund expenses. 

6. After the AXP Funds issued the new prospectus disclosures that prohibited 

market timing in January 2002, AEFC still permitted approximately 20 market timers to 

continue market timing the AXP Funds for an additional time period that lasted 

approximately six to eight months. 

7. The Director of Mutual Fund Products at AEFC described the rationale for 

providing the exceptions as providing “additional flexibility to these market timing 

customers based upon the magnitude of their investments.” These exceptions were not 

disclosed in the respective mutual fund prospectuses, nor were the boards of directors of 

the funds informed of these arrangements. 

Improper Market Timing in 401(k) Plans 

8. From January 1, 2002 through September 30, 2003, 27 past and present 

employees of AEFC and related companies market timed various AXP Funds through 

their 401(k) retirement plans. Although the AXP Funds’ prospectuses banned market 

timing starting on January 1, 2002, AEFC did not put in place any procedures to monitor 

the employees’ 401(k) accounts for frequent trading or market timing activity or disclose 

to investors that there were no such procedures until October 2003. 

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Improper Market Timing in Variable Annuity Products 

9. Anti-market timing language was added to the variable annuity product 

prospectuses sold by AEFC in May 2002. Prior to this addition, the variable annuity 

contracts referred the contract holder back to the fund prospectuses to determine whether 

a particular mutual fund permitted market timing. AEFC filed registration statements 

with the Commission that incorporated these new variable annuity product prospectuses. 

10. After the variable annuity prospectus disclosures were changed in May 2002, 

AEFC allowed a known market timer to continue to market time AEFC’s variable 

annuity products until October 2003. This exception was not disclosed in the variable 

annuity product prospectuses and the AXP Funds’ boards of directors were not informed 

of this arrangement. 

11. As a result of the conduct described above in paragraphs 4 through 10, AEFC 

willfully violated: 

a. Section 206(2) of the Advisers Act in that, while acting as an investment 

adviser, it engaged in transactions, practices, or courses of business which 

operated or would operate as a fraud or deceit upon clients or prospective clients; 

and 

b. Section 34(b) of the Investment Company Act in that it made untrue 

statements of material fact in a registration statement, application, report, account, 

record, or other document filed or transmitted pursuant to the Investment 

Company Act, or omitted to state therein any fact necessary in order to prevent 

the statements made therein, in the light of the circumstances under which they 

were made, from being materially misleading. 

12. By permitting market timing in its variable annuity products, as described above 

in paragraphs 9 and 10, AEFC also willfully violated Section 206(1) of the Advisers Act 

in that it, while acting as an investment adviser, employed devices, schemes, or artifices 

to defraud clients or prospective clients. 

Undertakings 

13. AEFC undertakes the following3

: 

a. At least once every year, starting in 2005, AEFC shall make presentations 

to its Board of Directors and the Boards of Directors of the AXP Funds (or any 

committees designated by the Boards of Directors to perform similar functions) 

that include an overview of AEFC’s policies and procedures to prevent market 

timing, any material changes to these policies and procedures and whether 

3

 The undertakings and sanctions set forth herein shall be binding upon all successors to and affiliates of 

Respondent. 

4
 
AEFC’s and the AXP Funds’ disclosures related to market timing are in 

compliance with this Order and the federal securities laws. 

14. Independent Distribution Consultant. AEFC shall retain, within 60 days of the 

date of entry of this Order, the services of an Independent Distribution Consultant not 

unacceptable to the staff of the Commission. AEFC shall exclusively bear all costs, 

including compensation and expenses, associated with the retention of the Independent 

Distribution Consultant. AEFC shall cooperate fully with the Independent Distribution 

Consultant and shall provide the Independent Distribution Consultant with access to its 

files, books, records, and personnel as reasonably requested for his or her review. AEFC 

shall develop a Distribution Plan for the distribution of all of the disgorgement and civil 

penalties ordered in Section IV.C. below, and any interest or earnings thereon, in 

accordance with a methodology developed in consultation with the Independent 

Distribution Consultant and acceptable to the staff of the Commission. The Distribution 

Plan shall address how the monetary sums attributable to AEFC’s violations related to the 

market timing described herein shall be distributed to benefit investors in the AXP Funds 

for market timing activity that took place between January 1, 2002 and September 30, 

2003. 

a. AEFC shall submit the Distribution Plan to the Independent Consultant 

and the staff of the Commission no more than 120 days after the date of entry of 

this Order. 

b. The Distribution Plan shall be binding unless, within 180 days after the 

date of entry of this Order, the staff of the Commission advises AEFC and the 

Independent Distribution Consultant, in writing, of any determination or 

calculation from the Distribution Plan that it considers to be inappropriate and 

states in writing the reasons for considering such determination or calculation 

inappropriate. 

c. With respect to any determination or calculation with which AEFC, the 

Independent Distribution Consultant or the staff of the Commission do not agree, 

such parties shall attempt in good faith to reach an agreement within 210 days of 

the date of entry of this Order. In the event that AEFC, the Independent 

Distribution Consultant and the staff of the Commission are unable to agree on an 

alternative determination or calculation, the determinations and calculations of the 

Independent Distribution Consultant shall be binding. 

d. Within 225 days of the date of entry of this Order, AEFC shall submit the 

Distribution Plan for the administration and distribution of disgorgement and 

penalty funds pursuant to Rule 1101 [17 C.F.R. § 201.1101] of the Commission’s 

Rules Regarding Disgorgement and Fair Fund Plans. Following a Commission 

order approving a final plan of disgorgement, as provided in Rule 1104 [17 C.F.R. 

§ 201.1104] of the Commission’s Rules Regarding Disgorgement and Fair Fund 

Plans, AEFC shall require the Independent Distribution Consultant, with AEFC, 

5
 
to take all necessary and appropriate steps to administer the final plan for 

distribution of disgorgement and penalty funds. 

e. To ensure the independence of the Independent Distribution Consultant, 

AEFC: (i) shall not have the authority to terminate the Independent Distribution 

Consultant, without the prior written approval of the Commission’s staff; (ii) shall 

compensate the Independent Distribution Consultant and persons engaged to 

assist the Independent Distribution Consultant for services rendered pursuant to 

this Order at their reasonable and customary rates; and (iii) shall not be in and 

shall not have an attorney-client relationship with the Independent Distribution 

Consultant and shall not seek to invoke the attorney-client privilege or any other 

doctrine or privilege to prevent the Independent Distribution Consultant from 

transmitting any information, reports or documents to the Commission or the 

Commission’s staff. 

f. AEFC shall require that the Independent Distribution Consultant, for the 

period of the engagement and for a period of two years from completion of the 

engagement, not enter into any employment, consultant, attorney-client, auditing 

or other professional relationship with AEFC, or any of its present or former 

affiliates, parent companies, directors, officers, employees, or agents acting in 

their capacity as such, provided, however, that notwithstanding the foregoing the 

Independent Distribution Consultant may serve as Independent Distribution 

Consultant pursuant to the Order Instituting Administrative and Cease-and-Desist 

Proceedings, Making Findings and Imposing Remedial Sanctions and a Ceaseand-Desist Order in the matter of American Express Financial Advisors Inc. 

AEFC shall require that any firm with which the Independent Distribution 

Consultant is affiliated in performance of his or her duties under the Order not, 

without prior written consent of a majority of the independent Trustees or 

Directors and the staff of the Commission, enter into any employment, consultant, 

attorney-client, auditing or other professional relationship with AEFC, or any of 

its present or former affiliates, parent companies, directors, officers, employees, 

or agents acting in their capacity as such for the period of the engagement and for 

a period of two years after the engagement. 

15. For good cause shown, and upon a timely application from AEFC or the 

Independent Distribution Consultant, the Commission’s staff may extend any of the 

procedural dates set forth above. 

IV. 

In view of the foregoing, the Commission deems it appropriate and in the public 

interest to impose the sanctions agreed to in AEFC’s Offer. 

Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act and 

Sections 9(b) and 9(f) of the Investment Company Act it is hereby ORDERED that: 

6
 
 

A. AEFC is censured. 

B. AEFC shall cease and desist from committing or causing any violations and any 

future violations of Sections 206(1) and 206(2) of the Advisers Act and Section 34(b) of 

the Investment Company Act. 

C. IT IS FURTHER ORDERED that: 

1. AEFC shall, within 60 days of the entry of this Order, pay disgorgement 

plus prejudgment interest in the total amount of $10 million (“Disgorgement”). 

AEFC also shall, within 60 days of the entry of this Order, pay a civil monetary 

penalty in the amount of $5 million (“Penalties”). Such payments shall be: (A) 

made by United States postal money order, certified check, bank cashier's check 

or bank money order; (B) made payable to the Securities and Exchange 

Commission; (C) hand-delivered or mailed to the Office of Financial 

Management, Securities and Exchange Commission, Operations Center, 6432 

General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under 

cover letter that identifies AEFC as a Respondent in these proceedings, the file 

number of these proceedings, a copy of which cover letter and money order or 

check shall be sent to Merri Jo Gillette, Division of Enforcement, Securities and 

Exchange Commission, 175 West Jackson Blvd., Suite 900, Chicago, Illinois 

60604. 

2. There shall be, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 

2002, a Fair Fund established for the funds described in Section C. Regardless of 

whether any such Fair Fund distribution is made, amounts ordered to be paid as 

Penalties pursuant to this Order shall be treated as penalties paid to the 

government for all purposes, including all tax purposes. To preserve the deterrent 

effect of the civil penalty, AEFC agrees that it shall not, after offset or reduction 

in any Related Investor Action based on AEFC’s payment of disgorgement in this 

action, further benefit by offset or reduction of any part of AEFC’s payment of 

Penalties in this action (“Penalty Offset”). If the court in any Related Investor 

Action grants such a Penalty Offset, AEFC agrees that it shall, within 30 days 

after entry of a final order granting the Penalty Offset, notify the Commission’s 

counsel in this action and pay the amount of the Penalty Offset to the United 

States Treasury or to a Fair Fund, as the Commission directs. Such a payment 

shall not be deemed an additional civil penalty and shall not be deemed to change 

the amount of the Penalties imposed in this proceeding. For purposes of this 

paragraph, a “Related Investor Action” means a private damages action brought 

against AEFC by or on behalf of one or more investors based on substantially the 

same facts as alleged in the Order instituted by the Commission in this 

proceeding. 

7
 
 

D. AEFC shall comply with the undertakings enumerated in Section III. 13 through 

15. 

By the Commission. 

Jonathan G. Katz 

Secretary 

8