Attorney General Bill Lockyer has sued American Funds’ distribution division for failing to inform investors about $426 million in “revenue sharing” payments to dozens of brokers who recommended its products.

“American Funds dressed up these arrangements with fancy names like ‘execution revenue,’ ‘target commissions’ or ‘broker partnership payments,'” Lockyer said in a press release. “But when you look beneath the cloak of legitimacy, the payments are little more than kickbacks to buy preferential treatment. Investors deserve to know that.”

American Funds is a unit of the Capital Group Cos., based in Los Angeles. Lockyer also sued another subsidiary, Capital Research and Management Co., the investment manager for American Funds.

The case seeks profits obtained through the practice, plus $25,000 per violation of the state’s corporate securities laws. Under those laws, American Funds failed to inform consumers about the payments or the company’s preferential treatments.

Lockyer said the payments, which began in January 2000, represent a broader problem in the mutual fund industry.

He said he “brings this action in response to an industry-wide mutual fund practice involving mostly oral, undisclosed agreements between mutual fund complexes and certain securities broker-dealers who sell fund shares to investors,” according to the suit, filed in Los Angeles Superior Court.

American Funds, which has 29 separate mutual funds with total assets of $600 million and 20 million shareholders, is also the target of a probe by the NASD (formerly the National Association of Securities Dealers), which alleges its distribution unit gave $100 million in commissions from 2001 to 2003 to brokerage firms that sold its mutual funds. The Securities and Exchange Commission is investigating the company’s practices as well.