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April 1, 2004

Soft Dollars Take Back Seat on the Hill

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Congressional lawmakers are unlikely to make changes in soft-dollar practices this year, according to Congressional sources.

That's because the clock is ticking in an election year and because two of the key Capitol Hill chairmen have affirmed that they don't want soft dollars killed. They also said that they favor greater disclosure and reform of the controversial practice, but they don't favor its abolition.

"Absolutely not," Peggy Peterson, deputy staff director and a spokeswoman for Rep. Michael Oxley (R-Ohio), the chairman of the House Financial Services Committee, told Traders Magazine. "He has said again and again that they should be reformed, but they shouldn't be ended," she added.

At the same time, lawmakers are watching the trading industry. In a climate of Wall Street scandals, some big players have taken steps to change or reform some soft dollar and unbundling practices. Massachusetts Financial Services Co., for instance, wants more transparency and has stopped paying brokers in soft dollars for research and other services. Mutual fund giant, Fidelity Investments, sent a letter to the Securities and Exchange Commission, proposing that brokers break out the cost of services in trade executions. The lawmakers are also weighing up the SEC's take on soft dollars. Indeed, SEC Chairman William Donaldson recently used his bully pulpit when he proposed a ban on directed commissions. Earlier, the Investment Company Institute joined the fray, urging the SEC to outlaw the use of soft dollars for independent research and non-research products.

The other key player in the house, Rep. Richard Baker (R.-Louisiana), the chairman of the House Subcommittee on Capital Markets, has his own bill that would reform, not abolish soft dollars. The Baker bill, HR 2420, passed the House last year on a 418-4 vote and has been sent to the Senate. A spokesman for Baker said, "the Congressman doesn't favor ending soft dollars." The spokesman was still hopeful that some fund reform might still pass the Congress this year, but he affirmed that Baker will not support any call to end soft dollars. The bill required the SEC to publish a report on what steps should be taken on soft dollars.

The Senate has been considering its own trading industry bill - the Mutual Fund Reform Act of 2004 - which calls for the abolition of soft dollars and directed brokerage. With the controversies swirling over soft dollars and the recent market structure reform proposals offered by the SEC, one Congressional staffer said there was little or no chance that anything of consequence on soft dollars will pass both houses of Congress.

"This is an election year. Little of substance is usually passed in this year because members are busy with campaigning," said the staffer, who declined to be quoted by name. A Washington attorney representing soft dollar firms, Lee Pickard, agreed.

"I'd say nothing is going to happen this year because there isn't time to pass something," Pickard, a former SEC official, predicted. The problem is the Senate and the House of Representatives are taking radically different approaches to soft dollars.

Nevertheless, Pickard noted that the Senate Banking Committee, which is headed by Sen. Richard Shelby (R-Alabama), will likely hold hearings on a bill by Sen. Peter Fitzgerald (R-Illinois). This bill, in part, targets directed brokerage and soft dollars for abolition. Any legislation that isn't passed this year dies with the end of this session. Those sponsors of any of these measures would have to re-introduce it in the next session of Congress, which begins in January 2005.