American Express 2004 Annual Report Download - page 110

Sales inducement costs consist of bonus interest cred-
its and premium credits added to certain annuity
contract values. These benefits are capitalized to the
extent they are incremental to amounts that would be
credited on similar contracts without the applicable
feature. Deferred sales inducement costs were $303
million and $279 million as of December 31, 2004 and
2003, respectively, and are included in other assets.
These costs were previously included in DAC and were
reclassified to other assets as part of the adoption of
SOP 03-1. The amounts capitalized are amortized using
the same methodology and assumptions used to amor-
tize DAC. The Company capitalized $71 million and
$72 million during 2004 and 2003, respectively, and
amortized $34 million and $24 million during 2004 and
2003, respectively.
Note 12 CONTINGENCIES
The Company and its subsidiaries are involved in a
number of legal and arbitration proceedings concern-
ing matters arising in connection with the conduct
of their respective business activities. These include
several class actions involving the Company’s card
and financial planning businesses among other
matters. The Company believes it has meritorious
defenses to each of these actions and intends to defend
them vigorously.
As has been widely reported, the Securities and
Exchange Commission (SEC), the National Association
of Securities Dealers, Inc. (NASD) and several state
attorneys general have brought proceedings challeng-
ing several mutual fund industry practices, including
late trading, market timing, disclosure of revenue shar-
ing arrangements and inappropriate sales of B shares.
AEFA has received requests for information concerning
its practices and is providing information and cooper-
ating fully with these inquiries.
In May 2004, the Company reported that the broker-
dealer subsidiary of AEFA had received notification
from the staff of the NASD indicating that it had made
a preliminary determination to recommend that the
NASD bring an action against AEFA for potential viola-
tions of federal securities laws and the rules and regu-
lations of the SEC and the NASD. The notice received
by AEFA comes in the context of a broader industry-
wide review of the mutual fund and brokerage indus-
tries that is being conducted by various regulators. The
NASD staff’s allegations relate to AEFA’s practices with
respect to various revenue sharing arrangements pur-
suant to which AEFA receives payments from certain
non-proprietary mutual funds for agreeing to make
their products available through AEFA’s national distri-
bution network. In particular, the NASD has alleged
that AEFA: (i) failed to properly disclose such revenue
sharing arrangements from January 2001 until May
2003; (ii) failed to properly disclose such revenue shar-
ing arrangements in its brokerage confirmations and;
(iii) received directed brokerage from January 2001
until December 2003. The notice from the NASD staff
is intended to give AEFA an opportunity to discuss the
issues it has raised. AEFA has been availing itself of this
opportunity and continues to cooperate fully with the
NASD’s inquiry regarding this matter, as well as all
other regulatory inquiries.
Congress also has proposed legislation and the SEC
has proposed and, in some instances, adopted rules
relating to the mutual fund industry, including expenses
and fees, mutual fund corporate governance and disclo-
sures to customers. For example, during the past year,
mutual fund and investment advisors were required by
the SEC to adopt and implement written policies and
procedures designed to prevent violation of the federal
securities laws and to designate a chief compliance
officer responsible for administering these policies and
procedures. While there remains a significant amount of
uncertainty as to what legislative and regulatory initia-
tives may ultimately be adopted, these initiatives could
negatively impact mutual fund industry participants’
results, including AEFA’s, in future periods.
The Company believes that it is not a party to, nor are
any of its properties the subject of, any pending legal,
arbitration or regulatory proceedings which would
have a material adverse effect on the Company’s con-
solidated financial condition, results of operations or
liquidity. However, it is possible that the outcome of
any such proceedings could have a material impact on
results of operations in any particular reporting period
as the proceedings are resolved.
Note 13 FAIR VALUES OF FINANCIAL
INSTRUMENTS
The following table discloses fair value information for
financial instruments. Certain items, such as life insur-
ance obligations, employee benefit obligations, invest-
ments accounted for under the equity method and
deferred acquisition costs are excluded. The fair values
of financial instruments are estimates based upon mar-
ket conditions and perceived risks at December 31,
2004 and 2003 and require management judgment.
These figures may not be indicative of their future fair
AXP
AR.04
108
Notes to Consolidated Financial Statements