The Securities and Exchange Commission yesterday unanimously approved a new rule that bars mutual fund companies from steering trades to brokers who promise to promote the funds in exchange for stock and bond business.
Regulators said the widespread practice, known as directed brokerage, raises questions about whether brokers are recommending the best products for investors.
The Securities and Exchange Commission ruled that mutual fund portfolio managers must disclose more information about their pay structures.
(Ken Cedeno -- Bloomberg News)
|
|
Commissioner Cynthia A. Glassman said the rule will help curtail serious conflicts of interest that "have grown dramatically as the mutual fund industry has grown." Commissioner Paul S. Atkins called the plan "a great step forward" for shareholders.
Responding to concerns expressed by trade groups, agency officials said that mutual fund companies could continue to use the same brokers both to sell their products and to execute trades on behalf of the funds, as long as the fund companies have policies to prevent quid pro quo deals.
Separately, the commission voted 5 to 0 to approve a rule that will force mutual fund portfolio managers to disclose more information about their pay structures and how big their ownership stakes in the funds are. The information will be available on funds' Web sites, agency leaders said.
The disclosure rule strikes "a very nice balance" between the interests of shareholders and the privacy concerns of fund managers, who did not want the public to have information about exactly how much they are paid, Commissioner Harvey J. Goldschmid said.
Yesterday's votes by the agency were the latest in a series of reforms to the mutual fund industry. The industry has been undergoing a shake-up since state and federal regulators uncovered evidence of widespread trading and governance abuses in September 2003. Since that time, the SEC has sued more than half of the country's 25 biggest fund companies.
SEC Chairman William H. Donaldson said the agency has acted on 10 of the 13 mutual fund rules it has proposed. Final action on a few remaining proposals will come this year, Donaldson said. That includes a plan that would require more disclosure to investors about fees at the point of sale and another that would impose new fees on quick trades in and out of mutual funds.
"We now have a system we ought to give a chance to work and see the improvements I hope it will bring," he said.
Also still on the SEC's agenda is a broader effort to examine the way mutual fund trading commissions are used to fund research and related services. Consumer groups have sought to ban outright the use of trading commissions to pay for distribution and marketing. But fund industry executives and brokerage groups say a ban goes too far and will increase costs that are passed on to investors.
Paul F. Roye, chief of the agency's Division of Investment Management, said his staff is continuing to study the controversial issue, as well as 1,600 public-comment letters the SEC has received.
Roye declined to describe the scope of the agency's review at this stage. He said the staff would publicly circulate a reform plan next year.
