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January 1, 2004

Indy Research Group Raises Soft-Dollar Alarm

By Gregory Bresiger

Congress should take steps to reform the fund and research industries, but it should not destroy the soft-dollar business. That's the position of a relatively new trade organization, Investorside Research Group, which is promoting independent research firms.

The position is endorsed by one prominent former SEC official, who now specializes in soft dollars. "This is definitely a cause whose time has come," said Lee Pickard, a Washington-based attorney who advises soft-dollar firms. Independent research, which comprises about five percent of the some $9 billion research industry, will grow - if unimpeded by lawmakers - by four fold over the next five years, with increased business coming from mutual funds, predicts the leader of Investorside.

"We're seeing more interest and I think our share of the research business will grow to 25 percent," said Scott Cleland, the chairman of the Washington-based group. A legal settlement between the regulators and the biggest Wall Street firms requires them to pay $430 million to support independent research over five years.

Cleland says that the buyside will need independent research. "It's not that Wall Street's research is useless, it's that one can question its objectivity," he said. Pointing to the investment banking business, Cleland said its research efforts had been "conflicted."

Some members of Congress have called for the abolition of soft dollars. However, Cleland, in a letter to the Senate Banking Committee, disagreed. And Pickard says a ban would be counterproductive. "Soft dollars are used to fund independent research firms," he said.

Meanwhile, the Investment Company Institute has urged the SEC to ban independent research as well as non-research items, such as computers, in soft-dollar arrangements. This comes as the SEC reportedly plans to require mutual funds to disclose all soft dollars as part of 12b-1 expenses.