SEC Probes Money Managers for Pocketing Commission Rebates

Mutual fund providers have become the focus of a new regulatory probe aimed at determining whether stock-trading rebates have benefited shareholders or lined the pockets of investment managers, The Wall Street Journal reports.

Brokerage firms handling mutual fund trades have been known to rebate as much as two cents of a five-cent trade in recent years when order flows reach pre-determined volumes, but the refunds are often used to pay for research instead of lowering annual expenses paid by shareholders.

The SEC now wants to know whether some mutual fund and hedge fund providers are using the rebates for personal gain or to offset the costs of justifiable business expenses, like equity research.

Mutual fund companies have been a target of shareholder activists who complain about the practice of overpaying for stock trades in exchange for discounts on equity research. While the tactic is legal, experts say some asset managers have abused the privilege. Reporting becomes murky on the subject of what percentage of the $3 billion hedge funds paid for stock trades last year was rebated and went into investment providers' pockets.