Securities Industry Association: Directed Brokerage Ban Will Help To Eliminate Conflicts Of Interest

The Securities Industry Association today expressed its support for the Securities and Exchange Commission’s rule to bar mutual funds from using directed brokerage to compensate brokers’ selling efforts. The new rule will help to eliminate potential conflicts of interest in mutual-fund sales. SIA also applauded the commission for clarifying that the rule is not intended to prohibit directing transactions to broker-dealers that distribute fund shares where funds have policies and procedures designed to insure that the transactions are consistent with best execution obligations, and not tied to the level of fund sales.

Under the amendments adopted today to rule 12b-1 of the Investment Company Act, investment companies will be prohibited from paying for the distribution of their shares with brokerage commissions.

“In our comment letter on the proposed rule (http://www.sia.com/2004_comment_letters/992.pdf ), we supported banning a quid pro quo arrangement between brokers and fund companies on the basis of sales of a particular fund, but cautioned against an overly broad ban that could deny investors the advantages of best execution and offer them only a limited choice of funds,” said Marc E. Lackritz, SIA president. “The SEC took into account those concerns in its final rule.”