NYSE Guidance on Directed Brokerage Arrangements
- NYSE Regulation has issued an Information Memo on the obligation of New York Stock Exchange member organizations to abstain from participation in directed brokerage arrangements prohibited by Rule 12b-1 under the Investment Company Act of 1940. NYSE Regulation Information Memo 06-38 (June 1, 2006). Rule 12b-1 was amended in 2004 to provide that that a mutual fund may not compensate a broker-dealer for any promotion or sale of the fund's shares by directing brokerage transactions to that broker-dealer.
The Information Memo states that member organizations are obligated, pursuant to Exchange Rules 401 and 476(a)(6) (which require good business practice and prohibit conduct inconsistent with just and equitable principles of trade), not to accept directed brokerage. A broker that both sells fund shares and executes portfolio transactions for the fund should obtain a written representation from the mutual fund company that the mutual fund company uses reasonable criteria in the selection of its selling brokers and has reasonable policies and procedures in place to ensure that no formal or informal directed brokerage arrangements will arise. In addition, such a selling/executing broker should implement policies and procedures that strictly prohibit its receipt of directed brokerage; should ensure that its staff receives appropriate training; and should review any information suggesting the existence of directed brokerage arrangements.
The Information Memo is available online (cutting and pasting of long file name may be required) at
For my post on the amendment to Rule 12b-1, see
John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
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Washington DC 20036
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