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July 15, 2007

Soft-Dollar Bill on the Horizon

By Gregory Bresiger

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  • Soft-Dollar Bill on the Horizon
  • Page 2

Soft-dollar brokers, start your lobbyists. Capitol Hill lawmakers, emboldened by a letter to two committees from Securities and Exchange Commission chairman Christopher Cox, will debate soft-dollar legislation this session.

That's according to several Congressional staffers who said at least one bill would be introduced this session that would tighten or possibly end the use of these controversial alternative commission arrangements.

"The senator is very interested in this issue and wants soft dollars better disclosed," said a Senate staffer who declined to be quoted by name or to identify his boss. The staffer promised that the senator would introduce a bill this year.

The Senate staffer said his boss would consider a bill that would either abolish soft dollars or at least require all trading costs be included in the expense fund ratio. Today, a fund's expense ratio is in the prospectus, but the brokerage commission charges are not included. Commissions are separately listed in the statement of additional information-and, as the staffer put it: "Who reads the statement of additional information?"

Soft-dollar brokerage is a practice that allows money managers to pay higher-than-usual brokerage costs in exchange for research services.

The practice, made legal by Congress in 1975 with Section 28(e) of the Securities Act of 1934, has been the focus of much handwringing in recent years, as soft-dollar supporters and foes clashed in Washington.

Most of the industry believed the issue was settled by an SEC "interpretative release" last July, but Cox surprised the industry when he called on both the Senate Banking and House Financial Services committees to either "repeal or substantially revise Section 28(e)."

In his letter, Cox found four faults with the use of soft dollars: they may create conflicts of interest between money managers and their clients; they may contribute to higher brokerage costs; they are difficult to administer; and they impede the development of efficient markets.

Cox is raising the issue at a propitious time. Democrats-several of whom unsuccessfully tried to pass soft-dollar reforms last year, when the GOP was in charge of Congress-now control Congress and the key committees where such a reform bill would likely originate.

Among the Democrats who would likely be key players in any debate are House Financial Services Committee chairman Barney Frank, D-Ma., and Senate Banking Committee chairman Christopher Dodd, D-Conn.

Another key player is Charles Schumer, D-N.Y., a member of the Senate Banking Committee. He has had close ties to the securities industry, and in the past has opposed the abolition of soft dollars, arguing it would "hurt the small guy."

With Sen. John Sununu, R-N.H., also a member of the Senate Banking Committee, Schumer sent a letter to the SEC last year stating, "without commissions supporting research, the investment public would be greatly disadvantaged."

Spokespeople for all of these members of Congress have been contacted, but none would publicly comment. Another soft-dollar player will be Senate Banking Committee member Daniel Kahikina Akaka, D-Hawaii.

Akaka is a soft-dollar critic. He authored an effort to reform soft dollars, the Mutual Fund Transparency Act of 2005, which would have required greater disclosure. It died in the last session.