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March 1, 2004

Soft Dollars Are Targeted

By Gregory Bresiger

Soft dollars and directed brokerage would be ended under the provisions of a comprehensive mutual fund fees reform bill, which was recently introduced in the U.S. Senate.

"Soft dollars distort the markets both in trade executions and products and services purchases because there is little or no meaningful price negotiation or competition in these areas," according to S2059 sponsor Sen. Peter Fitzgerald (R-Illinois). Fitzgerald, who is also pushing in this bill for the elimination of 12b-1 fees, complains the distortion comes because brokerage costs are not included in the mutual fund expense ratio.

"Thus, by using surreptitious soft dollars, instead of honest hard dollars, the industry effectively hides yet another significant cost of mutual find investment," wrote Fitzgerald, the chairman of the Senate Financial Management Subcommittee.

The bill, known as the Mutual Fund Reform Act of 2004 (MFRA), also has the backing of fund industry gadfly John Bogle, the founder of the Vanguard fund group. In testimony before Fitzgerald's subcommittee, Bogle said that soft dollars should be ended. "It comes down to a very simple principle, and that is, it is amazing how cheap everything you buy is if you buy it with other people's money," Bogle said. MFRA supporters say the bill is designed to "unbundle" the commission dollar.

"Managers should pay for their own overhead out of their management fee instead of forcing shareholders to pick up the tab through artificially inflated brokerage commissions," Fitzgerald said.

Sponsors of the bill concede that there will be pressure to reform soft dollars through greater transparency. A competing measure in the U.S. House of Representatives calls for more disclosure and limitation of soft dollars, but would not abolish them. However, Fitzgerald, ridiculing the call for more soft dollar disclosure, quoted John Montgomery of the Bridgeway Funds, "If you see a snake, just kill it -don't appoint a committee on snakes."