The Securities and Exchange Commission Wednesday banned directed-brokerage arrangements as a means for mutual funds to promote or sell fund shares.

In a unanimous 5-0 vote, the SEC put to an end to the longstanding practice of fund companies channeling brokerage commissions to broker/dealers as a reward for pitching their funds under the guise of rule 12b-1. These informal arrangements spurred a conflict of interest that caused investors to pay excessive fees and compromised best execution of fund trades, the SEC charged.

"Directed brokerage [practices] are far from the benign arrangements originally approved under rule 12b-1," said Penelope Saltzman, a member of the SEC’s division of investment management.

The SEC expects the National Association of Securities Dealers to follow suit by prohibiting brokers from selling shares of a fund if the fund’s manager or distributor takes into to account the sale of fund shares in selecting brokers to execute fund transactions. The Commission staff said it will continue to examine the 12b-1 issue to determine what more can be done to promote transparency in mutual funds.

The SEC also voted unanimously to enhance disclosure regarding portfolio managers including compensation structure, ownership of fund shares and the identification of other portfolio management team members.

The moves are part of a larger effort by regulators to curb abuse in the $7.5 trillion mutual fund industry in the wake of a widespread trading scandal that slapped a number of major fund houses with fraud charges.

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