SEC Set to Vote on Directed Brokerage Curbs

August 17, 2004 ( - Federal securities regulators are scheduled Wednesday to vote on rules that would curb fund companies from steering stock trades to brokerage firms that agree to sell their funds.

The vote by the Securities and Exchange Commission (SEC) would end a 24-year-old practice that encouraged brokerage firms to push certain fund offerings above others, the Associated Press reported.

Approval of the rule would represent the latest in a wave of legal and regulatory reactions following revelations of widespread fund trading abuses. A state/federal investigation has focused primarily on market timing, late trading, and certain sales practices.

SEC regulators warned that steering stock trades to brokerage firms that favor their funds can raise transaction costs paid and improperly influence broker recommendations. The pending rule also affects 12b-1 fees (See   SEC Gives Tentative OK to 12b-1 Limits, Disclosure Rules ).

The looming SEC vote has already prompted some mutual funds to change how they sell their funds. Earlier this year, Massachusetts Financial Services Co. stopped steering stock trades to brokerage firms as a reward for their sales of fund shares.

Mutual funds pay commissions to brokerage firms when stock is traded. Since 1980, funds have been free to use those payments to reward brokerage firms that promote their funds as part of the directed brokerage practice.The mutual fund and securities industries have supported the SEC, arguing that the relatively small amount of money involved in directed brokerage arrangements isn’t worth the public relations cost.