WASHINGTON - The SEC's long-awaited proposal requiring money managers to give institutional clients details of their soft-dollar arrangements with brokerage firms has come under fire from all quarters.
Under the Securities and Exchange Commission's proposal issued last week, money managers would have to tell pension funds and other institutional investors what research services and investment-related products they received from brokerage firms or independent research firms in exchange for funneling trades to them.
But the proposal, which has been in the works for a couple of years, does not ask money managers to break out this information by client, or to put a price tag on the soft-dollar research products and services they receive in exchange for commission dollars.
Pension fund executives say money managers, when requested, already provide most of the information the new rule would mandate.
And, money managers say they are only too happy to give clients whatever information on securities trades they seek. In fact, many say they already give clients more information on trading costs and soft-dollar services than the proposed SEC rule would require.
Other investment management professionals say the proposal doesn't go far enough. Investors will not get information on true execution costs - a comparison of the price at which money managers bought or sold a stock with the price at which the stock just traded - they complain.
And discount brokers that offer soft-dollar commission rebates, as well as independent research firms that flourish as a result of such arrangements, contend the SEC's concerns about abusive trading practices are overblown.
"We are already getting this information. I would therefore expect this requirement is not a great advantage to us," said Fred G. Weiss, vice president of planning, investment and development at Warner-Lambert Co., Morris Plains, N.J., who oversees the company's $1.2 billion pension plan.
Barbara C. Jacobs, of the Florida State Board of Administration, Tallahassee, agreed the SEC's proposal is unnecessary.
"Anytime we need information we can call our managers and ask them for it," said Ms. Jacobs, equity operations coordinator at the $39 billion state pension fund.
Like many other public pension funds that depend on soft dollars to pay for consulting, research and investment products they couldn't otherwise afford, the Florida fund requires its money managers to direct a percentage of trades to brokerage firms that then provide soft-dollar services to the pension fund.
Meanwhile, Theodore R. Aronson, partner at Aronson + Fogler, Philadelphia, notes the firm already gives clients reports every quarter on the trading costs of every single trade. "We think it's clients' money,"said Mr. Aronson, who suggests the proposal falls short of its objectives."Profit margins are high enough in money management that firms can report client-by-client information," he noted.
But SEC officials had contended asking money managers to provide client-specific reports would be too costly.
Stanley S. Abel, chairman of Abel/Noser, a New York discount brokerage firm, condemns soft-dollar-rebated commissions but offers those arrangements to clients who ask for them. He expressed surprise that the SEC's proposal doesn't require money managers to reveal the ratio of soft-dollar services they receive for every dollar of commissions they funnel to brokerage firms.
Mr. Abel and some others suggest the SEC caved in to the large Wall Street firms that claim they can't break out the cost of research reports and other services they offer clients who also trade securities through them.
Junius W. Peake, a professor of finance at the University of Northern Colorado in Greeley, and a former vice chairman of the National Association of Securities Dealers, called the rule unnecessary. "If soft dollars are OK, why do you need a rule. If soft dollars aren't OK, why not ban them?" he said.
But some others - including Harold Bradley, head trader at Investors Research Corp., an investment advisory affiliate of Twentieth Century Mutual Funds in Kansas City, Mo. - still see some merit to the proposal.
"People who are playing hard and fast with commissions will have to shape up because this is more transparent than we have ever had," Mr. Bradley said.
And Greta E. Marshall, general partner of The Marshall Plan, a Concord, Mass., money management firm, and a one-time chief investment officer of the California Public Employees' Retirement System, also suggested the proposal is better than nothing.
Institutional investors who already get trading cost information from money managers will be able to "compare account information with firm-wide information and see if they are being treated fairly compared to other clients," she said.
At the heart of the SEC's proposal is a more than decade-long debate over soft dollars. A provision in securities law allows money managers to use brokerage firms that charge higher commissions than the prevailing rate so long as they can show they receive research or other investment services that enable them to make a better investment decision. Soft-dollar arrangements have flourished since the SEC loosened its definition of research in 1986 to include virtually anything that helps money managers make their investment decisions.And, last week, SEC Chairman Arthur Levitt said: "Advisers may cause their clients to pay excessive commission rates, or may overtrade their clients' accounts simply to satisfy soft-dollar obligations."
The SEC's proposal would require money managers to tell their clients once a year how much they paid in commissions to the top 20 brokers with which they deal, and the percentage of their total commissions they paid to each of them. Money managers also would have to disclose commissions they paid in the preceding year to discount brokerage firms that only execute trades, unlike the full-service large Wall Street firms. What's more, money managers would have to disclose the average commission they paid on trades through each of the brokers on the list.