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SEC Bans Directed Brokerage Practices

Washington, DC, September 8, 2004 - The SEC has adopted  amendments to the Investment Company Act that prohibit the practice of compensating broker-dealers for selling mutual fund shares through the use of directed brokerage arrangements. Funds must comply with the new requirements by December 13, 2004.

Background
Directed brokerage refers to a practice regulated by the NASD where fund companies could consider, subject to strict limitations, the fact that a brokerage firm sells its funds when choosing a broker to execute portfolio trades. The SEC's ruling will prohibit the practice of directed brokerage, which allows mutual fund investment advisers to take into account sales of fund shares in selecting a broker-dealer to execute transactions in portfolio securities. Although directed brokerage is strictly regulated under existing rules, the practice could create potential conflicts of interest.

ICI Position
The voiced strong support for the SEC’s adoption of the directed brokerage rules. ICI President Paul Schott Stevens said, "Eliminating directed brokerage further advances efforts to ensure shareholders' best interests are protected." The [Institute  called for the reform in December 2003], and said then that the elimination of directed brokerage is a "milestone that will benefit fund investors and strengthen the operating integrity of mutual funds."

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