The SEC also is examining "mixed-use" arrangements, where money managers receive some permitted research and brokerage services as well as some other services outside the scope of the securities rule. "This is an area where we've seen tremendous abuse, and it's something under serious scrutiny," Ms. Morris said.
Also expected as part of the proposal is a requirement that brokers give investment advisory clients — including mutual fund directors — details of trading costs, including commissions and other transaction costs.
The SEC ultimately wants to open discussions between mutual fund directors and investment advisers "to drive down transaction costs," Ms. Morris said.
Money managers, for the first time, would have to disclose details of their soft-dollar arrangements in their annual Form ADV filings with the SEC.
"We're looking to clarify the books and records investment advisers and broker-dealers have to keep," Ms. Morris said, noting that inspections have found a "lackadaisical approach" to the record-keeping requirement.
The proposed rule is a huge victory for smaller, no-frills brokerage firms — also known as execution-only firms — that lack the resources for internal research. Those firms typically charge lower commissions on trades than full-service brokerage firms
Some money managers — including MFS Investment Management and Putnam Investments, both implicated in the mutual fund trading scandals — have stopped using soft dollars in an effort to refurbisPutnam Investmentsnt and Putnam Investments, both implicated in the mutual fund trading scandals — have stopped using soft dollars in an effort to refurbish their reputations.
"It would be more intellectually honest to say, ‘Let's just get rid of all soft dollars,' than target what is just the best part of soft dollars because it's the most transparent … and it's more independent than conflicting research from the sell-side brokerage firms," said David G. Tittsworth, executive director of the Washington-based Investment Counsel Association.
The SEC proposal is expected to be heavily influenced by the United Kingdom's expanded, voluntary disclosure code, expected to be published later this month by the Investment Management Association, London,
Under the U.K. code, money managers will give to pension fund clients early next year their data on trading volumes, commissions and soft-dollar usage for the second half of 2005, said Gordon Midgley, director of research at the IMA. In the future, managers will be required to give that information to all institutional clients.
The expanded code asks money managers to break out, by asset class for each client, total trading volume conducted during a specified period by the top 10 brokerage firms and electronic crossing networks. It also requires managers to give the percentage of trades on which no commissions, full commissions or other rates of commissions were paid.
Money managers also must describe how the commission dollars were allocated between execution and research products and services, Mr. Midgley said. The SEC's proposed rule, by contrast, would not include this breakdown, Ms. Morris said.