The mutual fund trade group, in a letter filed with the SEC , urged regulators to push forward with a proposed amendment to Rule 12b-1 prohibiting the practice of directed brokerage. In the letter authored by ICI General Counsel Amy Lancellotta, ICI said the practice raises questions about whether fund managers’ trading decisions are swayed by considerations other than shareholders’ best interests.
“Prohibiting the allocation of brokerage based upon sales considerations is warranted because the practice of directed brokerage can give rise to the appearance of conflicts of interest,” Lancellota said.
In addition to throwing its weight behind possible directed brokerage reforms, ICI also supported changes to how 12b-1 fees are reported. This support comes as the Institute notes “dramatic changes” in how individuals had come to invest in mutual funds since the rule was promulgated 25 years ago. For example, in a 1999 ICI survey, 95% of 12b-1 fees were found to be used as a substitute for front-end sales loads or to pay for administrative services to existing shareholders. The ICI’s comment letter stated that “[t]hese uses of 12b-1 fees, although not anticipated when first adopted, are nevertheless consistent with the rule’s administrative history.”
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