The Securities and Exchange Commission this week proposed guidelines for boards of directors at investment companies to use when evaluating the trading practices of their investment advisers.
The guidelines offer a laundry list of questions fund boards need to ask their advisers and information they need to get. At the top of the list is information about the adviser’s use of soft dollars. That’s the component of commissions that goes towards the acquisition of research and brokerage services other than executions.
The SEC, concerned about the conflicts of interest inherent in soft dollar usage, hopes fund boards will use the guidelines to decide whether or not their advisers’ use of soft dollars is appropriate.
“It is critical that fund investors understand how a fund adviser uses soft dollars,” SEC Chairman Christopher Cox said in a prepared statement at an open meeting Wednesday, “and whether soft dollars are being spent in the best interests of fund investors who ultimately pay for them.”
In its proposal, the SEC noted fund boards have an obligation to monitor their advisers’ trading, but many told the regulator they were unsure as to how to do so. The boards requested the guidelines, the SEC stated.
The regulator added that its goal was to help the fund boards and was not imposing new requirements on them.
“Evaluating an adviser’s trading practices can sometimes seem an overwhelming task,” Cox said. “Our goal is to help directors focus their review efforts and evaluate an adviser’s trading activities in the most efficient and effective way possible.”
Among the questions the SEC recommends fund boards ask are those related to how advisers determine how much to spend on soft dollars and how much to spend on proprietary versus third-party research.
