Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
September 20, 2004 01:00 AM

Soft-dollar task force set to issue recommendations

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    WASHINGTON — A task force set up by SEC Chairman William H. Donaldson earlier this year to review soft-dollar arrangements is expected to issue its recommendations sometime next month.

    The SEC had issued wide-reaching recommendations on soft dollars in a September 1998 report following "sweep" examinations of brokerage firms, money managers and mutual fund companies, but failed to act on those recommendations. Those exams had found that nearly one-third of the examined money managers used soft dollars to pay for routine business expenses rather than research, and they failed to tell their clients about them. Now, Mr. Donaldson, who is rumored to be stepping down at the end of the year, has made it a goal to address soft dollars before he leaves the SEC.

    In soft-dollar arrangements, money managers typically pay brokerage firms higher than the prevailing commission rates in order to obtain investment research services or products. The spate of mutual fund trading scandals in the last year has prompted heightened regulatory scrutiny of investment practices, including soft dollar arrangements..

    Stricter definition

    The soft-dollar task force, which reports directly to Mr. Donaldson, is expected to recommend a stricter definition of "research" that investment advisers may obtain from brokers through which they trade securities. The current interpretation, dating back to 1986, loosely defines research as any products and services that provide "lawful and appropriate assistance to the money manager in the carrying out of his investment decision-making responsibilities." But several lawmakers, and Mr. Donaldson in congressional testimony and speeches, have suggested the SEC should narrow the definition to "real" research, with valid, intellectual content, along the lines of the SEC's original 1976 interpretation that excluded "products and services which are readily and customarily available … on a commercial basis."

    "The consensus is that it's pretty broad and encompasses things that it should no longer encompass" such as computers, said Nancy Morris, an attorney-fellow in the SEC's investment management division and a member of the soft-dollar task force.

    The task force is also focusing on the type and degree of information brokerage firms provide money managers about the commissions that are rebated through soft dollars, as well as the disclosures investment advisers in turn give their clients about such arrangements, Ms. Morris said.

    These disclosures would apply not to just the third-party research that brokerage firms provide money managers, but they would also require the full-service Wall Street brokerage firms to unbundle or break out the cost of investment research they provide their clients under such arrangements. For years, Morgan Stanley & Co., Goldman Sachs & Co. and other large brokerage firms have maintained that it is nearly impossible for them to estimate the cost of the research they provide clients as part of their brokerage arrangements. "People tend to forget that proprietary research is a soft-dollar item, and while they properly record third-party research, they don't do a good job of keeping records of proprietary research," Ms. Morris said.

    No actions pending

    Brokerage firms and money managers that fail to properly document the cost of soft-dollar research could face enforcement action, and the SEC task force is expected to recommend that the regulator remind them of this responsibility. However, no enforcement actions are pending, Ms. Morris said.

    However, the task force has not yet tackled the thorny question of what should happen when a brokerage firm puts a cost on the in-house research it provides money managers that trade through it when those same money managers value the research as "worthless," she said.

    The task force dismissed a December 2003 Investment Company Institute proposal that the SEC ban brokerage firms from providing money managers with research services and products from outside firms.

    The task force had also dismissed a proposal by the Mutual Fund Directors Forum; in a July 2004 report, that organization argued for a complete ban on soft-dollar arrangements.

    Meanwhile, SEC officials declined to say when they will present their findings from "minisweep" examinations of soft-dollar arrangements, including those at index mutual fund managers, earlier this year. The examinations were intended to determine if some index funds were misusing soft dollars for simply tracking the broad market indexes.

    A sweep examination is targeted at industry practice or problems; minisweeps are quick examinations at a handful of representative companies, intended to give the SEC a snapshot of what is going on industrywide.

    Index funds need research

    On the surface, investment research might seem superfluous at index funds, which aim to replicate the movement of a broad basket of securities. It is not uncommon, however, for some index funds to hold a much smaller sample of securities as a proxy for the larger index, and investment research can be useful in determining which securities to buy.

    John H. Walsh, chief counsel in the SEC's office of compliance, inspections and examinations, said the inquiry is aimed at finding out how index funds are using soft-dollar research. "It's a legitimate question to ask," he said, speaking Sept. 13 to a group of compliance officers at a conference in Philadelphia sponsored by IA Week.

    The SEC had last conducted a sweep of soft dollar practices at broker-dealers, investment advisers and mutual funds in the fall of 1997 and discovered that many money managers did not disclose soft-dollar arrangements to their clients.

    Tom Taggart, a spokesman for Barclays Global Investors, San Francisco, the nation's largest index fund manager with $780 billion, said the company had been contacted by the SEC during its sweep examinations earlier this year, but company officials informed the SEC at the time that it does not participate in soft-dollar arrangements.

    John Demming, a spokesman for The Vanguard Group Inc., Malvern, Pa., said the mutual fund company does not comment on regulatory inquiries.

    Boston-based State Street Global Advisors, which has $522 billion under management in index funds, was not contacted by the SEC during the soft-dollar sweeps earlier this year, said Arleen Roberts, spokeswoman.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing