Fidelity Moves Soft-Dollar Payments Into the Light

June 28, 2004 ( - Fidelity Investments plans on paying for extra market data information with cash, in lieu of through soft-dollar arrangements.

As of July 1, Boston-based Fidelity will stop paying extra sums in brokerage commissions to gain access to market data from information providers, the Wall Street Journal is reporting citing company executives. Instead, Fidelity said the firm would buy such services directly, paying cash rather than wrapping the cost of these services into other commission structures.

Putting a price tag on it, Eric Roiter, general counsel of Fidelity’s investment-management arm, told the Journal the decision to pay directly for market data is expected to cost Fidelity $40 million to $50 million this year.   Fidelity said its stock mutual funds last year paid $815 million in commissions, of which it estimates about $160 million went for soft-dollar research and market data.

Fidelity is not alone in its move away from soft-dollar payments.   Greenwich Associates found the use of soft dollars by United States investment managers fell 18% last year to $1.24 billion.   The drop came as investment managers cut back on their use of this funding source for third-party research in the face of near certain regulatory intervention.   Even this year, other fund companies have cut their use of soft dollars.  In March, Massachusetts Financial Services Co. (MFS) said it would stop paying soft dollars for market data, as well as some research.

While the practice is not against the law, soft-dollar transactions have been the subject of intense Securities and Exchange Commission (SEC) (See SEC Gives Tentative OK to 12b-1 Limits, Disclosure Rules ) and Congressional scrutiny. A mutual fund bill that cleared the US House of Representatives last year would require greater disclosure of soft-dollar arrangements while a bill introduced in the US Senate by Senator Peter Fitzgerald, (R-Illinois), would ban them altogether (See Senate Fund Reform Bill Would Kill 12b-1 Fees ).