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November 1, 2000

Soft-Dollar Disclosure Rule Deferred

By William Hoffman

A proposed new soft-dollar disclosure rule has been deferred by the Securities and Exchange Commission.

Under the controversial proposal, some investment advisers would be required to disclose how they spent clients' commission dollars in the previous year.

That includes information about research and other services obtained by the advisers.

Advocates of soft dollars are up in arms over the proposal, which was originally part of a rule that covers electronic filings.

"Long-term, this casts negative aspersions on the industry," snapped Lee Pickard, a partner at Pickard and Djinis, the Washington, D.C. law firm representing the Alliance in Support of Independent Research, an umbrella group for soft-dollar broker dealers.

Higher Commissions

Pickard said the SEC's draft proposal assumed that brokers offering research generally charge higher commissions. The proposal also assumed that investment advisers, and not their clients, accrue to themselves the benefits of their research. "Research is a way for brokers to attract order flow in the door," Pickard said.

The SEC declined comment on the future of soft-dollar disclosure rules. But Pickard said he expects the SEC will submit a modified proposal on soft-dollar disclosure requirements next year.

Soft dollars have been the focus of SEC concern at least since the release in September 1998 of its "Inspection Report on the Soft Dollar Practices of Broker Dealers, Investment Advisers and Mutual Funds."

The issue remains a contentious one, especially for institutional investors and their representatives who believe soft-dollar arrangements are ripe for abuse.

"We've felt like there's been a covert effort to withhold this information from shareholders," said John J. Wheeler, manager of equity trading at American Century Investment Management in Kansas City, Mo.

Current disclosure requirements lack accountability on how much is paid and for what, Wheeler said. The proliferation of soft-dollar arrangements impedes the downward pressure on brokerage commissions, he noted.

Moreover, he added, soft dollars also yield selective benefits. Soft dollars, Wheeler complained, are too often diverted to non-research purposes, such as office supplies and software, which current disclosure rules aren't designed to expose.

"I don't want to be on the record calling for more stringent disclosure requirements," Wheeler said.

However, mandatory disclosure "probably goes a long way toward eliminating the abuses," he added.

Pickard for the AIR acknowledged that larger investors are more likely to get sophisticated research than smaller investors: "The bigger they are, the more research they are likely to need, and that they are likely to get."

But soft-dollar arrangements are also available for smaller investors, he added.

Educating Investors

The Council of Institutional Investors, an association representing some 110 public, corporate, and labor pension funds, has been educating members on what to demand for their commissions, said managing director Peg O'Hara.

"It's a sort of consciousness-raising thing for the institutions who may not have known what was going on," O'Hara said.

In the absence of new disclosure requirements, the council is continuing to urge member organizations to know what their brokers' soft-dollar policies are.