The Securities and Exchange Commission, with impetus from Congress, has put the issue of soft dollars back on the front burner, with increased regulation a likely outcome despite some calls for a complete ban on the practice.
"A lot started from Richard Baker's inquiry from the Hill," said Theodore Eichenlaub, a former SEC official and founder of Adviser Compliance Associates, Washington, referring to the Louisiana Republican who chairs the House Financial Services Capital Markets Subcommittee.
"When the Hill talks, the SEC listens," Mr. Eichenlaub said. "The Hill talked and the SEC listened."
Mr. Baker's committee raised the soft-dollar issue during hearings on Nov. 3 over mutual fund trading practices. In his opening statements, he cited his bill, HR 2420, that would require the SEC to require more disclosure of soft-dollar arrangements from mutual fund advisers including an annual report from fund advisers on those arrangements and enhanced record keeping. It would also require the SEC to undertake a study on soft dollars to determine industry trends and how soft dollars impact investors' ability to compare mutual fund expenses. The bill is pending.
At the Nov. 3 hearing, William Galvin, Massachusetts state secretary, urged the panel to ban soft dollars because of their cost to investors.
But Paul Roye, director of the SEC's investment management division, called such a ban "a complicated issue" and said in testimony the same day that while the agency backs a re-examination of what soft dollars can buy, a lot of independent research is funded by soft dollars.
Indeed, some industry professionals question the logic of such a ban, saying it would reverse some of the very reforms the SEC has been working toward.
"Soft dollars is a way for people to buy independent research, and it seems to me it can't be in anyone's interest to reduce the amount of independent research out there," said Alan Herzog, chief operating officer and chief financial officer of Hoenig & Co. Inc., the soft-dollar and directed brokerage unit of broker-dealer ITG Inc., New York. "That seems to be the opposite of where the SEC is heading; they want more independence."
In fact, as part of the landmark $1.4 billion settlement among 10 major Wall Street brokerage houses, two analysts and the SEC approved on Oct. 31 by U.S. District Judge William Pauley III, the firms must spend a total of about $433 million to fund independent research for investors. The agreement, reached in April, settles charges that the firms' research was unduly influenced by their investment banking activities.