The main trade group for the mutual fund industry called on regulators to investigate soft-dollar commissions, a practice that is prone to conflicts and has even been called a "kickback" system.

The Investment Company Institute (ICI) on Monday proposed that the Securities and Exchange Commission (SEC) limit soft-dollar commissions only to proprietary research, but a group of small broker-dealers immediately blasted the proposal, Reuters reported.

"If acted upon, the Investment Company Institute's proposal would cripple the independent research industry," Lee Pickard, counsel to the Alliance in Support of Independent Research, said in a statement Tuesday.

ICI had proposed changing the current system, in which fund managers provide services or equipment to fund managers in exchange for high trading commissions. For example, brokers have provided third-party research or office equipment, such as Bloomberg or Reuters terminals and printers.

"Eliminating this outlet for soft dollars would forcefully address an area that some believe has been most prone to problematic conflicts," said the ICI, according to the Financial Times. ICI Chairman Paul Haaga said ICI was also proposing an outright ban on directed brokerage, the practice of a fund firm directing its trading to a broker in exchange for the broker selling its funds.

The ICI announcement came as the $7 trillion industry reacts to strong pressure for radical reform from regulators who have found widespread market timing and after-hours trading abuses. The soft-dollar issue has also attracted scrutiny.

Pickard said the ICI proposal would limit money managers' access to independent financial research from broker-dealers. It would also hurt the ability of small money managers and their investment funds to compete with their larger peers, eventually leading to higher commission rates to investors, he said.