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April 30, 2004

Senate Gets an Earful of Soft Dollars

By Gregory Bresiger

The time for soft-dollar reform is now.

With that, the U.S. Senate Banking, Housing and Urban Affairs Committee heard a parade of witnesses and diverse recommendations on what should or should not be done about soft dollars.

Harold Bradley, chief investment officer for American Century, reminded the committee that his firm has been calling for reform since 1992.

Among his recommendations: prohibit soft dollars for the purchase of computers, publications and the costs of professional seminars. He also called for soft-dollar record-keeping reforms.

"Soft dollars are largely undisclosed," Bradley told the committee. "They damage investor interests when used for things that don't directly benefit them."

Bradley estimated that investors are paying $6.3 billion a year in additional charges because of soft dollars.

Another soft-dollar critic, Benn Steil, a fellow of the Council on Foreign Relations, charged that, using soft dollars, "fund managers are trying to finance as much of their operating costs as possible using their clients' assets, rather than their own. And the only way that they can do this legally, other than the management fee, is through trading commissions."

Steil's proposed soft-dollar reforms include more disclosure, eliminating section 28(e), which legally sanctions soft-dollar practices, or else requiring fund managers to pay trading commissions out of their own funds. The latter is an approach under consideration by regulators in the U.K.

An executive representing some 300 investment advisory firms backs greater record-keeping. He also supports any reforms that re-state the fiduciary obligations of investment advisers and others, who are required to obtain best execution.

However, Geoffrey Edelstein, managing director, Westcap Investors, and an official of the Investment Counsel Association of America, said his group would oppose any move to eliminate soft dollars.

Edelstein said that's because it would hurt the growth of third-party research.

"We believe this approach would harm investors and diminish the availability of quality research," Edelstein said. "It would result in an unjustifiable, unlevel playing field for many market participants. It would provide a regulatory-driven advantage for full-service brokerage firms and disadvantage third-party research providers."

Senator Richard Shelby (R-Alabama), the chairman of the Senate Banking Committee, noted that Congress was expecting a report from the SEC on soft-dollar reforms. Congressional observers have said that it is unlikely that any legislation that would reform or abolish soft dollars will pass Congress this year.