Unbundling is at the top of the agenda for two industry watchdogs.
Both the Department of Labor (DOL) and the Securities and Exchange Commission are expected to push the investment community to disclose more commission information to investors in the coming months.
Any changes will likely force brokerage and money management companies to unbundle or break out commissions into their research (soft-dollar) and execution components.
To what extent commissions are to be disaggregated, though, is an open question-and one that worries industry executives.
“Coming up with that kind of disclosure is hard, particularly in soft dollars,” said Kathryn McGrath, an attorney with Mayer, Brown, Rowe & Maw, and a former SEC official, of the DOL’s proposal.
Labor’s Employee Benefits Security Administration (EBSA) has, unexpectedly, taken the more aggressive tack of the two regulators. The regulator of the $4 trillion pension industry is currently evaluating industry feedback on its July 2006 rule proposal requiring pension plans to disclose more information on their annual Form 5500 filings.
Form 5500 has come under heavy criticism from Congress’ General Accountability Office and others, who call it useless as a tool for regulating pension plans.
EBSA’s proposal included plan-by-plan and broker-by-broker commission unbundling. The agency recently said it will “publish a final regulation in the next several months.”
EBSA also plans to propose another rule this spring targeting organizations that service pension plans, such as money managers. The rule will require them to give customers information regarding the compensation and fees they receive.
The proposed changes to Form 5500 have been blasted by many on the buyside and sellside as needlessly onerous. The Securities Industry Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) both claim that providing plan-by-plan and broker-by-broker commission breakdowns would require a Herculean effort by the industry.
It would also yield little information of value. “Requiring plans to report on a broker-by-broker basis the gross dollar amount of commissions and fees paid during a plan year makes no sense,” SIFMA told EBSA in December.
At least one specialist in pension matters believes EBSA will have to reconsider its stance. “They will have to modify [the proposal] to reflect the realities of what people are in fact capable of providing,” said Richard “Brick” Susko, an attorney with Cleary Gottlieb Steen & Hamilton.
The aggressive posturing by the Department of Labor-frequently criticized as a lazy regulator-has surprised many in the industry who were expecting the SEC to take the lead on the soft-dollar disclosure front.
Both SIFMA and the ICI have asked the DOL to drop its proposal’s commission requirements and wait for the SEC to weigh in. The SEC, the industry’s top regulator, has traditionally been the referee in matters pertaining to soft dollars.
The SEC had said it would produce some disclosure guidelines last year, but never did. Those guidelines were expected to mirror disclosure rules approved by England’s Financial Services Authority in 2005-rules considerably narrower in scope than those proposed by EBSA.
The SEC’s Division of Investment Management is now expected to publish something this year.
“The SEC is actively looking at the issue,” said Lee Pickard, an attorney with Pickard & Djinis, and a former SEC official. “There is pressure to do something, but things have not been done. But they have been meeting with industry groups.”
Pickard believes it is the SEC’s role to deal with soft-dollar issues, not the DOL’s. “It’s a little bit unseemly for the Department of Labor to want to deal with this issue when they don’t really have the sensitivity or resources of the SEC. That’s important, because this could have a major impact on the structure of the markets.