CHARLOTTESVILLE, Va. -- The AIMR's new soft-dollar guidelines should help institutional investors get more information about such arrangements between their money managers and brokers, but might not give money managers adopting them any marketing advantage.
That's because the Association for Investment Management and Research's new voluntary guidelines simply ask money managers to disclose details of their soft-dollar relationships with brokers, but do nothing to discourage them.
(In a soft-dollar arrangement, money managers direct trades with certain brokerage firms, in exchange for in-kind commission rebates -- such as research. Federal securities and pension law permit money managers to pay higher than prevailing commissions to brokerage firms so long as they receive investment research in return.)
The guidelines, adopted late last month, ask money managers to tell new clients before their money is used in investment manager-directed brokerage transactions. Money managers must also tell current clients their policies on soft-dollar arrangements, including a description of the type of research received through such arrangements.
Money managers also must tell clients the manager will provide, if requested, details on the type of research products and services the manager received in the soft-dollar deal.
The AIMR's final soft-dollar guidelines -- first proposed last fall -- relaxed the definition of research acceptable as part of these arrangements.
The new wording focuses on the research's "primary use" as it helps money managers in making investment decisions, bringing the definition closer to the existing industry practice.
The draft guidelines limited the type of research acceptable under these arrangements based on their "primary content," which was inconsistent with the way research is defined by the Securities and Exchange Commission, according to Kristi Potts, director of compliance at Capital Institutional Services, Dallas, a soft-dollar brokerage firm.
The final guidelines also clarified that money managers must tell clients, upon request, the total amount of commissions generated for that account through soft-dollar arrangements, broken down by broker, as well as all research and services obtained firmwide through such relationships, but do not have to cross-reference the two.
"There are some organizations that have obtained a marketing advantage by saying they don't use soft dollars at all, but that is different from disclosing how you are going to use them," said Marshall E. Blume, a professor of finance at The University of Pennsylvania's Wharton School in Philadelphia, who has written extensively about such arrangements. "My gut feeling is that disclosing your use of soft dollars will not create a great competitive advantage."
Added Junius "Jay" Peake, a finance professor at the University of Northern Colorado in Greeley, "I don't think its going to help them sell any stock."
And William F. Quinn, president of AMR Investment Services Inc.in Dallas-Fort Worth, Texas, decried the guidelines as "not all that effective."
The new AIMR standards just ensure money managers provide pension plans and other clients with information about their soft-dollar arrangements with brokers, but large institutional investors already can get that information upon request, he said.
For example, the approximately $6 billion American Airlines Inc. pension fund, which AMR oversees, usually bans its money managers from engaging in soft-dollar transactions. When they do use soft dollars, Mr. Quinn said, the managers must provide a quarterly statement of all such trades, and explain why they were necessary.
Theodore Aronson, managing partner of Philadelphia-based money manager Aronson + Partners, believes the AIMR's soft-dollar standards might become the norm -- just as its performance standards did. If that happens, money managers that do not adopt them could be at a competitive disadvantage.
Wayne Wagner, chairman of the Los Angeles-based Plexus Group, an investment consulting firm, was a member of the AIMR task force that developed the soft-dollar standards. He agrees with Mr. Aronson: "Who wants to say, 'We don't believe in these standards of open disclosure'." Besides, the AIMR's standards "tend to have a lot of sway," Mr. Wagner noted.
What's more, even staunch opponents of soft-dollar usage, such as H. Garth Dickey, former director of the Indiana Public Employees' Retirement Fund, conceded the standards are a good first step.
"I would like to see all the AIMR members being AIMR-compliant, including adopting these" standards. But he warned, the buck ultimately stops with pension plan sponsors.
"It's important for plan sponsors to continue to understand the fiduciary duty of oversight lies with them, whether or not a money manager is AIMR-compliant," said Mr. Dickey, now managing director at MWV Capital Partners, Indianapolis.