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Jared Dillian
Traders Magazine Online News

Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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August 31, 2004

Industry Groups Battle Over Soft Dollars

By Editorial Staff

Another group is making its case to the regulators that professionals using soft-dollar arrangement profit at the expense of investors.

"Soft-dollar arrangements benefit a fund's adviser because it is spared the expense of purchasing or obtaining its own research provided by the broker dealer," according to a paper recently sent to the SEC by the Mutual Fund Directors Forum. The trade group contends that soft dollars inevitably lead to potential conflicts of interest.

Informal Arrangements

"Accordingly, the Forum recommends a fund board, under the leadership of its directors, not permit the fund's adviser to participate in soft-dollar arrangements in trades for the fund," the group wrote in its letter to the SEC. "Ideally, this prohibition regarding soft-dollar arrangements should extend to both formal and informal soft-dollar arrangements and to both proprietary research and third-party research," the group added.

However, another group, the Alliance for Independent Research, warns that the elimination of soft dollars would lead to consequences for the fund adviser, who would not be able to obtain adequate research services.

Lee Pickard, an attorney for the Alliance, who also represents various soft-dollar providers, said the Mutual Fund Directors Forum had not made an effective case that the use of soft dollars compromises the judgment of any financial professional.

"Without citing any quantitative or empirical evidence, the Forum has attacked a practice which has been used by mutual fund advisers for decades to improve the performance of managed funds," says Pickard, a former SEC director of market regulation.

Pickard adds that soft-dollar arrangements are easy to track and have been recognized as legal for decades.

The trading industry has a stake in this debate because soft-dollars revenues are estimated to generate some $1 billion annually, a sum tied to executions for institutional firms.