Brokerage firm A.G. Edwards indicated in an SEC filing this week that it expects its revenue to decline as a result of the ban on directed brokerage by mutual fund companies, the St. Louis Post-Dispatch reports. The firm did not disclose, however, how much of a decline it expects, although it did say that in combination with other regulations, the changes could have "significant and adverse" effects.

The SEC put a ban on directed brokerage primarily for two reasons. First, it can prompt brokers to push inappropriate funds on investors in exchange for fund companies rewarding them with commissions on big blocks of trades. Second, such arrangements may result in higher trading costs at the expense of investors’ returns because funds become more focused on sales opportunities, rather than costs. The ban took effect this past Wednesday, but firms have until Dec. 13 to fully comply.

"In that kind of arrangement, a certain quantity of the order flow is predetermined to go through a broker who is selling the mutual fund product," explained John Wheeler, vice president of U.S. equity trading at American Century. Wheeler added that his firm does not use directed-brokerage agreements.

Some industry experts believe the ban will, indeed, result in lower trading costs, but others say fund companies will simply find other ways in lieu of trading commissions to reach sales agreements with brokers.


The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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