The U.S. Securities and Exchange Commission barred U.S. mutual funds on Wednesday from channeling brokerage commissions toward Wall Street firms based on their promotion of the funds' shares.
The SEC's five-member panel voted 5-0 to bar so-called "directed brokerage," citing a conflict of interest that may cause investors to pay inflated costs and compromise best executions for shareholders.
The measure is one of two proposed earlier this year by the SEC, aimed at stemming widespread trading abuses involving mutual fund managers, hedge funds and intermediaries.
SEC Chairman William Donaldson said that in recent years it has become clear that directing fund brokerage to a broker as compensation for distribution of fund shares "presents opportunities for abuse."
Targeting a conflict of interest that critics say inflates costs for investors, the ban on "directed brokerage" is one of several SEC reforms undertaken amid scandals in the $7.5 trillion U.S. mutual fund industry.
Government investigators have shown that some fund managers allowed improper market timing and illegal late trading in their funds by managers of hedge funds, often in return for investments by the hedge funds in other areas.