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July 1, 2008

More Trading Oversight on The Way

By Peter Chapman

Buyside traders may soon find themselves under more scrutiny. The Securities and Exchange Commission plans to issue guidelines for mutual fund boards to aid them in their oversight of fund company trading practices.

Andrew "Buddy" Donahue, the SEC's director of the Division of Investment Management, recently said at a Securities Industry & Financial Markets Association conference that "the division recognizes the need to provide additional guidance to assist mutual fund boards in their oversight responsibilities with respect to best execution and the use of soft dollars."

Afterward, Donahue told Traders Magazine he expected a proposal to be put out for public comment "this summer" and that it has been in the works for the past two years. The proposal, he said, should be considered the "second installment" after the SEC's July 2006 interpretive release covering soft dollars.

The SEC official, who has held his current post for two years, noted that the guidelines would be flexible enough for firms and directors to maneuver. Rather than a detailed prescriptive document, the proposal is intended to act as a "framework," Donahue said.

That sits well with the Mutual Fund Directors Forum, a Washington-based group representing independent fund directors. David Smith, the forum's executive vice president and general counsel, said "well-written" guidance from the SEC or commission staff is "a good idea." But if it is "too specific, it might not be appropriate for every board and be unhelpful."

"Every fund or complex faces very different circumstances," Smith said. "If the guidance is overly specific, it can hem in the form of the review in a way that might be helpful for some boards but not others."

The SEC's Donahue told the SIFMA convention that the proposal would "maintain flexibility for firms and fund directors to oversee trading operations in a manner that they determine appropriate in light of their particular circumstances."

He cautioned, however, that despite the SEC's flexible approach, "the conflicts associated with trading decisions, and particularly soft dollars, are very serious."

Donahue reminded the crowd that it had recently charged Fidelity Investments with failing to seek best execution by improperly accepting more than $1 million in gifts from brokers.

The SEC's focus on best execution sits well with Meyrick Payne, a senior partner with Management Practice, a Stamford, Conn.-based consultant to fund boards. He believes fund boards are "overly obsessed with commission rates" as opposed to other aspects of trading such as market impact and capital commitment costs.

"The guidance is interesting," Payne said, "presuming it leads fund directors to be more interested in total cost analysis-transaction-cost analysis, or TCA."

Both Payne and the Mutual Fund Forum's Smith note that any emphasis by the SEC on soft dollars would also be helpful for fund board directors.

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