The largest U.S. brokerages say a provision in the regulatory reform legislation passed in July could hurt their lucrative sales of shares in initial public offerings.

Under the Dodd-Frank Act, the Securities and Exchange Commission is conducting a six-month study of the impact of a proposed fiduciary standard for brokers.

The rule would require them to put their clients first, as investment advisers now must. Currently, brokers must only show that an investment is "suitable" for a particular client.

Brokers who sell shares in IPOs underwritten by their firms generally receive a higher commission for those transactions than for sales of other securities already trading in the market.

Some say such a compensation structure runs counter to the proposed higher standard.

"It's like someone going to a doctor," said Blaine Aiken, president of investment adviser-training firm Fiduciary360. "You don't expect them to recommend a medication because the pharmaceutical rep will pay them for it."

While the new law does not preclude brokers from selling shares in IPOs, the SEC now must reconcile that practice with the higher standard.

In an August 30 letter to the SEC, the Securities Industry and Financial Markets Association, a lobbying group that represents the large U.S. brokerage firms, said brokers could get around the conflicts associated with selling IPOs by disclosing them to clients.

SIFMA General Counsel Ira Hammerman said clients have the right to choose from a full array of investment products and are capable of understanding the conflicts involved.

"What I don't like to see are people who advocate that ... we need to be very paternalistic and protect the investor from themselves," he said in an interview.

SIFMA wants brokers to provide a disclosure at the beginning of the relationship with a new client. The disclosure, written in plain English and large type, would explain what IPOs are and how brokerage firms and advisers are compensated, said Hammerman.

Currently, investment advisers who want to sell shares in IPOs must get the client to sign a disclosure detailing the conflicts of interest before every transaction.

SIFMA says this requirement is unworkable for brokers, as it is difficult to get clients to return disclosures, and by the time they do, the shares may not be available.

"Effectively precluding or significantly impeding retail customers from participating in these markets could have a significant adverse effect on capital formation in the United States," SIFMA said in its comment letter.

But investment advisers say that focusing on disclosure misses the point.

If brokers can get around conflicts by simply disclosing them, then the client must assume a "buyer beware" stance, said Knut Rostad, chairman of lobbying group Committee for the Fiduciary Standard.

"Nowhere in (SIFMA's) submission do they talk about avoiding conflicts of interest and making sure the adviser only proceeds with the transaction if it can be fairly shown that it's in the client's best interests," said Rostad, who is also the regulatory and compliance officer at Falls Church, Virginia, investment adviser Rembert Pendleton Jackson.

Others said buying shares of IPOs is not always in a small investor's best interest.

In particular, an IPO of a closed-end fund consists of the sale of a fixed number of shares to investors, but unlike a mutual fund, is not obliged to buy them back upon request.

Share prices of closed-end funds have fallen an average of 17 percent six months after they went public, said University of Florida finance professor Jay Ritter.

"If a broker recommends that a client buys a closed-end fund IPO, in most cases he is putting his commission ahead of the client's best interests," said Ritter.

Fiduciary360's Aiken said he advocates a standard that would require brokers to demonstrate that a particular IPO is the best investment for a client.

"And if so, they need to show why the client should buy it today and not tomorrow" in the open market, Aiken said, adding that brokers could also alleviate the conflict by selling IPOs for the same commission as they get for regular securities.