Mutual fund complexes and brokerages firms are
bracing themselves for a raft of new regulations that are likely to be
issued by the Securities and Exchange Commission and the National
Association of Securities Dealers later this year. Privately,
executives in both businesses are worried that the new rules may
increase the cost of compliance dramatically, and that the major brunt
of these additional costs will be passed to small investors, who are
often the least efficient to service.
One likely development that is expected to be announced in the first quarter is an industry-wide settlement fining broker-dealers for charging mutual fund companies shelf-space fees for preferred positioning on their platforms. "We already know how much the fine is," says an executive at a major independent brokerage.
But exactly what the new rules will be regarding marketing support payments from product sponsors, a major source of revenue for many brokerages, is still unclear. A total elimination of these payments would completely rearrange the economics of the brokerage business and probably force a reduction in payouts to reps.
Another issue in the regulatory crosshairs is the use of B shares, which substitute a contingent deferred sales charge for an upfront sales load, and C shares, which charge investors an annual level load in the 1% range for several years. Rumors have circulated in recent weeks that the new regulations could significantly restrict sales of both share classes.
Apparently, regulators have grown increasingly concerned that investors did not receive proper disclosure about the deferred nature of B share sales loads and also are concerned some brokers are selling C shares without providing the ongoing service they were expected to when that share class was created. If the regulations are as draconian as some expect, they could encourage many brokers to consider converting to registered investment advisors.