ICI Supports NASD Proposal to Prohibit Directed Brokerage Practices

Washington, DC, November 29, 2004 - The Institute supports proposed NASD rule changes that would strengthen the prohibition against an NASD member favoring the sale of shares of any investment company based on brokerage commissions.

Background
The ability of a mutual fund adviser to take into account sales of fund shares in allocating brokerage is currently governed by NASD Conduct Rule 2830(k). This practice is often referred to as "directed brokerage". Rule 2830(k) permits this practice, but sets various conditions. Among other things, the rule requires that:

Adoption of the NASD proposal would complement the SEC's recent amendment to Rule 12b-1 under the Investment Company Act of 1940, which prevents funds from paying for the distribution of their shares with brokerage commissions.

ICI Position
The Institute supports the NASD proposal and, in a recent comment letter, notes that the proposal is consistent with Institute recommendations made in December 2003. The Institute supports rules that prohibit fund advisers from taking into account the sale of fund shares when selecting brokers to execute trades in securities held or to be acquired by the fund. Clear regulatory guidelines avoid both the appearance of conflicts of interest and the potential for actual conflicts.

ICI also supports a provision of NASD's proposal that clarifies that an NASD member would not violate the rule solely because the member promotes or sells shares of a fund for which it also executes portfolio transactions. The Institute notes that, in today's world of integrated financial services firms, most of the major broker-dealers that funds typically use for execution services also distribute the funds' shares. Without this language, broker-dealers might be improperly discouraged from performing both execution and sales functions for a particular fund.