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May 26, 2005

SEC to Follow FSA's Softing Policies?

By Gregory Bresiger

Soft dollars could only be used by fund managers for the purchase of execution and research services under a set of proposed rules just published by the United Kingdom's Financial Services Authority.

The FSA, which has been working with the Securities and Exchange Commission on soft-dollar rules, would also "require investment managers to disclose to their customers details of how these commission payments have been spent and what services have been acquired with them."

The rules, which are expected to be adopted this summer, call for "additional disclosure, address the issues of transparency and accountability raised by soft commissions," according to Hector Sants, managing director of the FSA's wholesale business unit.

John Meserve, president of BNY Jaywalk, the independent equity research unit of Bank of New York, praised the FSA recommendations. "They are outstanding," Meserve told Traders Magazine. "Managers are now going to be required to share more information."

Meserve, who noted that the SEC has a soft-dollar task force that is due to report sometime later this year, will likely follow the lead of the FSA. The SEC is expected to propose a rule that would clarify the definition of research under Section 28(e) of the Securities Exchange Act.

But, Meserve added, it will not end soft dollars because "the practice is critical for the growth of the independent research industry."

John Boersma, senior director, professional standards with the CFA Institute, added that the FSA recommendations, "are really in line with our thinking on this. We feel that the commissions belong to the client and they need to be spent in their best interests so there needs to be better disclosure." The regulators believe better disclosure is necessary to prevent soft dollars being used to pay for office furniture and equipment, for example, instead of research that assists customers, Boersma added.

Mixed use soft-dollar arrangements are also reportedly under review by the SEC. CFA says mixed use refers to products and services provided by a broker to a manager that have the capacity to be used for both the investment decision and management. Boersma said that the SEC will probably take the same position as the FSA. The SEC task force is expected to require managers to specify soft-dollar arrangements with brokerages. Pension and fund clients, under the expected rules, will have to know the costs of these arrangements.

Some brokerages argue it is difficult to quantify the value of research to institutional customers. Generally, that's because the research is provided by brokerages, without an explicit charge, in exchange for order flow.