SEC Votes To Bar Directed Brokerage

Voting 5-0 to end the practice, the Commission said directed brokerage arrangements created a conflict of interest that ultimately could raise the fees mutual fund investors pay, Reuters is reporting.   Under directed brokerage arrangements, mutual funds would funnel a portion of their brokerage commissions toward Wall Street firms based on their promotion of the funds’ shares.

The vote by the Securities and Exchange Commission (SEC) ends a 24-year-old practice that encouraged brokerage firms to push certain fund offerings above others.   Additionally, t he SEC attention to the issue 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.