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News September 27, 2004 Issue

Careful Where You Step-Out

The new rule for step-outs on mutual fund trades: step-outs can still be done, they just can’t be done for fund distribution purposes. Following the new ban on fund brokerage for distribution, "the buy-side really has to know why the step-out is occurring," said Goldman Sach’s Susan Sidd, speaking at the ICI Equity Markets Conference.

Could an adviser use step-outs to compensate a consultant that refers business to its fund? "I don’t see how you are going to be able to square that with the SEC rule," said Sidd’s co-panelist Shearman and Sterling partner Craig Tyle.

Interestingly, T. Rowe Price’s David Oestreicher said he’s heard of brokers, after performing a trade, writing a check to another broker dealer instead of sending a step-out. He asked his co-panelists whether they they’ve heard of such arrangements. None had. Tyle noted that the SEC rule is very broad and prohibits any kind of understanding that fund brokerage will be used to reward brokers for distribution. If Broker A cuts Broker B a check based on your fund’s commissions to reward Broker B for selling your fund shares, "I think you’ve violated the rule and I wouldn’t go there," Tyle said.

What about commission sharing? The panelists agreed that commission sharing among broker-dealers can be "perfectly permissible," provided that the broker receiving the portion of the commission was involved in the execution.