Soft-Dollar Debate Continues Red Hot

March 3, 2004 ( - The issue of soft-dollar arrangements continues to show why it is controversial and divisive as an investment advisor group spilt with the leading mutual fund trade association over banning the use of soft dollars to pay for research and other benefits.

In a    statement posted on its Web site, the Investment Counsel Association of America (ICAA), which represents more than 300 investment advisory firms, insisted the Investment Company Institute (ICI) was wrong to suggest the research ban, Dow Jones reported. Soft-dollar arrangements allow advisers to receive research or other benefits from brokerage companies.

“If adopted, the proposal would unfairly advantage full-service brokerage firms and disadvantage third-party research providers, as well as clients of investment advisers who benefit from third-party research,” the ICAA said.

In a December    letter to the US Securities and Exchange Commission (SEC), the ICI had proposed prohibiting the use of soft dollars to pay for computers, software, investment publications and research provided by third parties, even though a 1998 SEC study found no soft- dollar abuses involving third-party research. ICI Chairman Paul Haaga said questions about soft-dollar deals “cast a pall” over all investment advisers regardless of their practices.

While the ICI stopped short of calling for a ban on soft-dollar deals, it recommended the SEC sharply curtail their use, ruling out the purchase of third- party research. For its part, the ICAA preferred a requirement for enhanced disclosure of soft-dollar practices while avoiding more draconian measures.

“Ensuring appropriate disclosure in a competitive market will allow investors – rather than regulators – to make choices about soft dollar practices that work for them,” the ICAA wrote.

Banning the use of third-party research as part of a soft-dollar deal would hurt investment advisers, most of whom run small operations that don’t manage mutual funds, the ICAA said. It also predicted that such a ban would also hurt their clients by cutting off the flow of independent research.

While the practice is not against the law, soft-dollar transactions have been the subject of intense 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 ).