SEC Approves NASD Proposal to Ban Directed BrokerageWashington, DC, December 22, 2004 - The SEC recently approved amendments to an NASD conduct rule that would prohibit broker-dealers from receiving mutual fund brokerage commissions as compensation for the sale of fund shares. 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: - the policy must be described in the fund's prospectus;
- no broker may favor or disfavor the sale of fund shares based on commissions it receives;
- no broker may demand commissions as a condition for selling shares of a fund; and
- the broker must provide best execution.
The amendments to Conduct Rule 2830(k) were originally submitted by the NASD to the SEC in February 2004 and complement amendments recently made 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. NASD will publish the effective date of the amendments in a forthcoming Notice to Members. ICI Position
The Institute supported the NASD proposal in a November comment letter, in which ICI also noted that the proposal is consistent with recommendations made by the Institute 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.
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