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January 1, 2005

An NASD Boost for Soft Dollars

By Gregory Bresiger

It was a happy holiday season for supporters of soft dollars. The alternative payment practice was acknowledged to be "especially beneficial to the clients of smaller investment advisers," according to a regulatory report issued just before the holidays.

The NASD report of the Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs basically endorsed the use of soft dollars, some analysts said. Its rationale was that some advisers lack effective research capabilities.

"These smaller advisers can afford neither a large internal research staff nor extensive hard dollar payments for research," the report continued.

A longtime observer praised the NASD. "They've pretty much nodded approval in the use of soft dollars for independent research," says attorney Lee Pickard, a former SEC director of market regulation.

Pickard said that the SEC, which also has its own task force studying soft dollars, will likely reach the same conclusions as the NASD group. He predicted the results of the various studies will be more disclosure rules, but a continuance of the practice. "There has been little abuse of soft dollars," says Pickard, now an attorney who has been working with a private group trying to preserve soft dollars.

The NASD held that Section 28(e), the 1975 safe harbor for soft-dollar practices, remains an effective way of avoiding possible abuses of the practice. Nevertheless, the NASD did recommend several additional controls. For instance, it proposed a narrower interpretation in the scope of research services as defined under the Section 28(e) safe harbor.