May 10, 2004

Consumers Union and other Groups submit letter to the SEC Supporting Prohibition on Practice Leading to Conflict of Interest on Mutual Fund Investments

Organization supports banning of directed brokerage practices

WHAT: The SEC proposed a rule examining mutual fund prohibiting mutual funds’ use of brokerage commissions to finance distribution.

WHY: Consumers Union and other consumer groups believe directed brokerages (use of brokerage commissions to finance distribution, services, and other goods) drive up transaction costs and encourage brokers to recommend funds that are not in the best interests of the investor.

• Fund advisers use excessive commissions to purchase goods and services that frequently do not benefit the shareholder and are not reported as expenses.

• A ban on unreported expenses between fund advisors and brokers, called soft dollars, is needed to supplement the ban on directed brokerage.

• Improved disclosures on conflicts of interest are not a suitable substitute for a ban on these practices.

• The SEC should also examine 12b-1 fees (marketing fees paid by investors), broker compensation rules, and broker-dealer practices

WHO: Consumers Union, Democracy Fund, Consumer Federation of America, and Consumer Action

• Sally Greenberg, Consumers Union
• Barbara Roper, Consumer Federation of America
• Mercer Bullard, Democracy Fund
• Kenneth McEldowney, Consumer Action

HOW: Comments due May 10, 2004. See Consumer group comments at Contact the SEC at to comment on rule proposals.