SEC Drops Soft-Dollar Disclosure

The Securities and Exchange Commission is expected to issue new guidelines for mutual fund boards this quarter intended to help them identify conflicts of interest with soft-dollar arrangements.

While intended to further the SEC’s goal of ensuring that fund boards more vigorously police their managers’ commission spending, the expected guidelines aren’t as far-reaching as those the regulator previously indicated it planned to issue.

The SEC had stated it would put out a proposal requiring investment managers to disclose certain information regarding their soft-dollar usage to their clients. Many observers took that to mean the SEC would follow in the footsteps of England’s Financial Services Authority and ask money managers to provide their clients with a breakout of the research and execution components of their commission payments.

Instead, the regulator’s less aggressive stance is being interpreted as a go-slow approach that could still be followed by disclosure guidelines. Indeed, one SEC official, in a speech last October, said that in light of recent developments in the market, the regulator didn’t want to risk over-regulating.

Lee Pickard, a principal with attorneys Pickard & Djinis, and a former SEC official, said, “The SEC can say a lot in this guidance to fund boards, but I don’t think they are going to say you must in all instances separate the cost of research from the cost of execution.”

Pickard added that any guidance could come in the form of questions fund boards should be asking fund advisers, as well as what kind of information they should be receiving to determine whether or not the soft-dollar practices are in the best interest of the funds.

Others note the SEC’s move appears to be a response to pleas made by the Independent Directors Counsel, the Mutual Fund Directors Forum and the Investment Company Institute for a standardized set of questions covering soft-dollar usage.

While such information may not be needed by fund boards at some of the larger firms, sources say, it would be helpful for smaller shops, such as those managing $1 billion or less.

The change in the SEC’s thinking came to light during a speech last fall by Andrew Donohue, a director in the SEC’s Division of Investment Management.

Donohue told attendees of the Investment Company Institute’s annual operations and technology conference that his staff was working on guidance to “assist them in monitoring conflicts of interest inherent in soft-dollar arrangements, while being careful to avoid recommending guidance that will adversely affect the evolution of the trading markets in an unintended way.”

Donohue maintained that the use of new trading technologies is already making it easier for investment advisers to “more precisely value the cost of research and brokerage services obtained with soft dollars.” He also noted that the FSA’s disclosure rules are having an impact on U.S. firms.

Still, at least one institutional brokerage executive noted that any move by the SEC to help fund boards elicit qualitative information on soft-dollar usage from their managers does not rule out a future request for quantitative information.

“This could be a halfway measure,” said John Meserve, a director at BNY ConvergEx. “The SEC doesn’t want to create burdensome reporting that may or may not be helpful, but, at the same time, this type of step doesn’t preclude them from following on with FSA-type disclosure.”


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