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January 1, 2007

Commission Spending Again Under Review

By Gregory Bresiger

Money managers would be required to make plain how much of its clients' assets are used as commissions to pay brokers under a bill that will be re-introduced in the new Congress.

Indeed, new, tighter rules now have a "much better chance" of being passed by the new Congress, says a spokesman for Senator Daniel Kahikina Akaka D-Hawaii.

In the last session of Congress, Akaka offered what he called a "soft-dollar reform" bill, the Mutual Fund Transparency Act of 2005, which stipulated that investment companies clearly disclose how much is spent on brokerage.

Brokerage charges can be a significant expense for an equity fund. These charges are now listed in a fund's "statement of additional information," rather than listed with all other costs in the prospectus under the expense ratio section.

The statement of additional information is a document that few investors request and even fewer actually read. In a typical domestic equity fund, an expense ratio may be listed at 1.5 percent in the prospectus, but brokerage costs, disclosed elsewhere, might drive up the costs of the fund to 2 percent or higher. Akaka wants these additional costs disclosed in the expense ratio

Akaka's measure died in the last session. The bill will be re-introduced this month, a spokesman said.

"Obviously, we think it will get more attention this time because the Democrats are now in control of the Senate and because the senator is a member of the banking committee," Akaka's communications director, Jon Yoshimura, told Traders Magazine.

Christopher Dodd, (D-Connecticut), is the new chairman of the Banking Committee. Yoshimura said the senator would like the chairman to hold hearings on the use of soft dollars.

Last year, lobbyists for soft dollar brokers were able to make an effective case before the Securities and Exchange Commission, which recognized and clarified their use. The regulators ultimately decided that these commission practices could, under some circumstances, help the investor obtain independent research.

Akaka has repeatedly emphasized that he wants to reform soft dollars, giving consumers more information on how their commission dollars are spent. In the past, he has not ruled out possibly abolishing soft dollars.

"This is a recommendation that needs to be further examined," Akaka said.