SEC Proposes New Soft Dollar Disclosure Rules for Money Managers

The Securities and Exchange Commission is proposing investment advisers disclose more information to their clients about their soft dollar usage.

In an Open Meeting this week, the SEC voted to propose amendments to the rules governing the primary disclosure form used by investment advisers, including changes to the soft dollar section.

The proposed rules would force money managers to add more detail to their descriptions of soft dollar use and make those details accessible on the Internet. They do not, however, go as far as requiring money managers to break out their commission payments into their research and execution components.

“Under the amendments,” SEC Chairman Christopher Cox said at the meeting, “the adviser would have to describe the types of products and services it obtains through these soft dollar arrangements and whether it pays more for research than it otherwise would pay without the use of soft dollars.”

The proposal targets the second section of Form ADV. Investment advisers are required to file this two-part form as part of the registration process with the SEC. The first part includes a description of the adviser and is filed electronically. The second part describes the adviser’s services, fees, and investment strategies. It does not have to be filed electronically, but will be if the SEC adopts the proposed rules.

Money managers must now disclose certain information about their soft dollar usage in Part 2 of Form ADV, but the information is perfunctory “check-the-box” data. The new rules would require fuller disclosure. The SEC is expected to publish the details in the Federal Register soon.

The SEC’s move is considered significant by soft dollar watchers. “This is a significant step forward since at least 1999 when the SEC’s Office of Compliance Inspections and Examinations came out with a soft dollar report that dealt with disclosure,” Kevin Zambrowicz, a partner with attorneys Bingham McCutchen in Washington, said. “This is a first attempt to try and create some rationality and some greater granularity. It will clearly have an impact on a number of firms.”

The SEC said in a statement that any new rules would affect 10,000 registered investment advisers dealing with 20 million clients.

The SEC is not asking money managers to unbundle their commission payments into their separate research and execution pieces, an aspect of disclosure that has received much attention. Still, based on Cox’s statement, advisers will have to address the conflict of interest inherent in paying for research with client dollars.

“They will have to talk about the fact that they are paying up,” Zambrowicz said. “They will have to talk about the fact that they are getting something as an adviser that they would’ve had to pay for themselves if they weren’t using soft dollars. That sort of granularity doesn’t exist today.”