SEC to Release Soft Dollar Instructions

June 26, 2006 ( - Federal securities regulators are reportedly preparing their final guidance on the controversial topic of soft-dollar arrangements that can allow investment managers to use client money to fund brokerage and research expenses.

The Wall Street Journal quoted Securities and Exchange Commission (SEC) spokesman John Nester as saying that the agency will issue clarifying orientation materials about the rule this summer. Last year, the agency published a draft of the guidance (See  SEC Invites Soft Dollar Regulatory Input  ).

SEC investigators have been looking into the use soft dollars because of concerns that they were being used abusively. The guidance coming out later this year will be designed to give money managers a clearer idea of what services they can pay for with soft dollars. The practice is sanctioned under Section 28(e) of the Securities and Exchange Act of 1934.

Mutual-fund directors are among those who are watching the soft-dollar issue closely. As fund trustees, they want to be sure they are in line with the rules on which services are “softable,” according to Robert Uek, independent director of MFS Funds and chairman of the Independent Directors Council. He said directors would love nothing more than more disclosure on the unbundled costs of services, so that they can make sure they are getting the best prices for each component.

According to the Journal, some firms have begun splitting the cost of trading and the costs of these other services, a practice known as unbundling. Last year, Fidelity Investments struck deals with Lehman Brothers Holdings Inc. and Deutsche Bank AG’s Deutsche Bank Securities to unbundle the fees and pay for research from their own cash, reducing costs for their funds’ shareholders, the Journal said.

A study to be published soon by Greenwich Associates found that firms’ soft-dollar usage has stabilized after many firms reduced their reliance on it because regulators were scrutinizing it. The total amount of soft-dollar commissions used to purchase third-party equity research and services held steady from 2005 to 2006 at an estimated $970 million, and US institutions expect that level to hold in the coming 12 months,Greenwich reported.

Soft-dollar arrangements are where a money manager pays inflated commissions on trading, which are deducted from clients’ accounts, to cover the costs of services provided to the money manager.