The Securities and Exchange Commission is expected to vote Wednesday on a controversial proposal banning directed brokerage, the common practice of mutual fund providers steering trading business to brokerage firms that push the companies' investments, The Washington Post reports.
The cozy relationship between brokerage firms and fund companies has for years raised the ire of shareholder advocates who say investors suffer as a result of higher trading costs. Regulators have also expressed concerns that the practice leads to a conflict of interest by creating an incentive for brokerage firms to hawk specific investments rather than finding the most suitable funds for their clients.
More than a dozen investment providers are under investigation for alleged conflicts of interest stemming from unscrupulous directed-brokerage practices. Massachusetts Financial Services Co. was fined $50 million in March for withholding the details of its directed-brokerage practices from trustees and shareholders. In addition, regulators asked Morgan Stanley Dean Witter to pay $25 million last year for a similar violation.
The Investment Company Institute this year has thrown its weight behind a proposed crackdown on directed-brokerage activities. Also, The Securities Industry Association has backed a variant of proposed regulations curtailing directed-brokerage practices that permit mutual fund companies to pay for brokerage services that potentially benefit investors, such as speedier trade executions.
In addition, industry experts also predict that the SEC Wednesday will sign off on new disclosure guidelines requiring fund portfolio managers to disclose more facts about personal investments in assets under their watch.