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June 4, 2007

SEC Says Expect Some Unbundling

By Peter Chapman

A rule proposal from the Securities and Exchange Commission requiring money managers to unbundle their commission payments is likely, but not anytime soon.

That's the word from Christopher Cox, the SEC's chairman, as well as Bob Plaze, an associate director in the SEC's Division of Investment Management.

Cox, speaking at the annual policy conference of the Mutual Fund Directors Forum, told attendees the SEC would "consider whether fund boards could better assess soft dollar arrangements if the Commission were to mandate better disclosure of the research and brokerage services that the adviser gets in return for a bundled commission."

He added that directors might be able to make "more meaningful inquiries" into the value of the extra services fund shareholders were getting if directors could compare a broker's execution-only rate with its bundled rate.

Plaze was more specific at a recent Investment Company Institute conference in Palm Desert. He told attendees the SEC staff was considering requiring an amendment to Part II of Form ADV that would include a quantitative measure of soft dollar benefits.

He added the industry should not expect any changes to SEC rules governing soft dollar disclosure anytime soon, but changes were on the way.

Money managers are required to file Form ADV with the SEC if they manage more than $25 million in assets. Part I contains general background information.

Part II includes information on the manager's services, fees, and investment strategies. It also includes general information about soft dollar practices such as the types of services received.

Plaze tried to mandate increased soft dollar disclosure in Form ADV before. That came in 2000 when the SEC tried to force advisers to describe their business practices in considerable detail. The industry fought back though and today soft dollar disclosure on the form is minimal.

Any attempt to require more disclosure under the current SEC regime will also be difficult, sources say. For one thing, Cox prefers unanimous decisions from his board of five directors.

That could make it difficult for SEC staff to push through aggressive new rules or could lead to only mild disclosure requirements.

"My guess is the [investment management] division will try to come up with a proposal that is very much mainstream," said Tom Harman, a partner with Morgan Lewis & Bockius and a former associate director of the SEC's division of investment management. "There will probably be some additional disclosure, but not a ton of additional disclosure."