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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.
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.
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."
- ICI Supports SEC Action on Directed Brokerage, Portfolio Manager Disclosures, August 2004
- ICI Strongly Supports SEC Proposal to Ban Directed Brokerage, May 2004
- ICI Comments on SEC Proposal to Eliminate Directed Brokerage, May 2004
- ICI President Commends SEC For Proposing To Eliminate Directed Brokerage, February 2004
- ICI President Challenges Critics of ICI Soft Dollar Ban, December 2003
- Mutual Fund Leaders Take Hard Stand on Soft Dollars, December 2003
- ICI Urges SEC Rulemaking on Soft Dollars, Directed Brokerage, December 2003