WASHINGTON - Pension plans, mutual funds and other institutional investors can look forward to receiving far more information on their money managers' soft-dollar arrangements with brokerage houses, under rule changes being contemplated by the SEC.
The Securities and Exchange Commission is considering asking money managers to provide greater details of such arrangements on the form ADV they must file with the regulator, Barry B. Barbash, director of the agency's investment management division, told members of the Labor Department's ERISA Advisory Council examining the practice earlier this month.
The agency also is expected to make that recommendation in its report analyzing soft-dollar practices, following a series of "sweep" examinations of brokers and money managers conducted last fall and in the spring of 1997.
The ADV is a form on which money managers must provide details of their business to the regulator. They are expected to annually update the form.
Coming under scrutiny
In soft-dollar arrangements, money managers receive in-kind commission rebates rather than cash discounts from brokers in exchange for directing trades to them.
The practice has come under scrutiny of regulators and lawmakers in recent years following widespread reports of abuses. Section 28(e) of the Securities Exchange Act of 1934 permits money managers to pay higher-than-typical commissions to brokers in exchange for research services and products that can help them improve their investment decisions.
But critics say the SEC's definition of research is too loose.
Although money managers already must provide on the ADV some information about their soft-dollar arrangements, their disclosures tend to be "fairly boilerplate," Mr. Barbash told the ERISA Advisory Council.
In fact, many money managers are "probably not in compliance" with the disclosures now required of them on the form, observed Douglas J. Scheidt, associate director and chief counsel of the SEC's investment management division.
"We've seen no disclosure, or woeful disclosure or false disclosures" of soft-dollar arrangements by money managers, Mr. Scheidt said.
Asking managers for details
Under consideration is asking money managers to give specific details of the types of research products and services they received from brokers, as well as non-research products and services they received, Mr. Scheidt said.
About one-third of the 75 brokers audited by the SEC in the recent sweep examinations paid for the money managers' rents, travel expenses, employee salaries, postage, parking, furniture, college tuition and even, apparently, wedding expenses in one instance, Mr. Barbash told the ERISA Advisory Council.
Securities rules do not forbid money managers from using soft-dollar credits for non-research purposes, so long as their clients know about it and don't mind, Mr. Barbash said.
"We want the adviser to provide that kind of disclosure so that the client can take it into consideration and decide whether to hire that money manager," Mr. Scheidt noted.
Money managers also likely will have to outline whether the research benefited the client that generated the trades - and the soft-dollar credits - or was used for servicing other clients.
For example, if soft-dollar credits generated by trades conducted by an equity mutual fund were used to buy research that helped the money management firm oversee a tax-exempt fund, that information is pertinent, Mr. Scheidt said.
Negotiating lower fees
Giving this kind of detailed information to pension executives, mutual funds and other investment clients could enable them to negotiate lower advisory fees, Mr. Scheidt commented.
Currently, investment advisers are required to specify on the form the factors used in selecting brokers to whom they direct trades - including receiving research - and the reasonableness of their commissions. If research is indeed a factor, money managers must describe research products and services they receive from the brokers in exchange for directing trades there.
The form also asks the investment advisers if they paid higher commissions for the trades than they would have paid brokers who don't offer soft-dollar research, and whether the research could be used in making investment decisions of clients other than those whose trades paid for the soft-dollar research.
Finally, money managers are required to describe the procedure they used in the previous fiscal year to direct trades to brokers in exchange for soft-dollar research products and services.