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.