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The SEC's deregulatory push on mutual funds

For the Securities and Exchange Commission, deregulation is still sometimes okay.

On the same day that President Obama signed a law introducing dramatic new regulation of the financial sector, the SEC took a major step toward deregulating mutual fund fees.

Today, every brokerage charges the same fee for buying shares in a particular mutual fund, and they can't compete with one another. That means that a bare-bones online broker will charge you the same as a full-service broker.

The thinking behind this regulation? If the price of buying shares in a particular mutual fund is fixed, then brokerages can't charge investors artificially high prices on mutual funds.

Yesterday, the SEC proposed that brokerages be able to compete on the sales fees (or loads) that they charge when you buy or sell a mutual fund. A brokerage would be allowed to set the sales fee on a particular mutual fund, if the fund allows it.

This is no doubt a deregulatory move. SEC officials view it as a smart one, a measure that would boost competition and drive down prices. For those who worry that the proposal would make it easier for brokerages to overcharge investors, the SEC recalls that the same concerns were raised when brokerages were allowed to start competing on commission fees for buying and selling stocks many decades ago.

(And it's not pure deregulation. The SEC is looking to force funds to disclose more about their fees and to cap some of them.)

Still, any kind of deregulation carries risks. Brokerages may choose to offer funds at a lower cost only to their richest clients. If brokerages charge less, will services to investors decline? And how will the incentives for brokers to choose lower- or higher-cost funds change?

It'll be a test of whether deregulation can still pass muster when everybody is thinking in the opposite direction.

By Zach Goldfarb  |  July 22, 2010; 12:13 PM ET
Categories:  SEC  
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