SEC Draws Hard Line on Soft Dollars

After more than a decade of discussion, the SEC has finally issued guidance on the controversial fate of soft dollars.

After more than a decade of discussion, the SEC has finally issued guidance on the controversial fate of soft dollars. In July, the regulatory watchdog narrowed the definition of research under Section 28 (e) of the 1934 Securities Exchange Act after examining the merits of the practice due to concerns over abuse.

Soft dollars, monies bundled with trading commissions and paid to brokers in exchange for research, have been a Wall Street institution for years. But critics argue that soft dollars are really kickbacks that force shareholders to unwittingly pay for items that extend beyond research, such as Bloomberg terminals, laptops, office furniture and even golf clubs for traders.

The new rules, scheduled to take effect on Jan. 24, 2007, call for money managers to limit their research spending only to products that assist in making investment decisions that benefit investors directly. Third-party research would still be protected under the safe-harbor clause and, therefore, can still be paid for with commission fees. Permissible research includes discussions with analysts, some seminars or conferences, portfolio analysis software, and corporate governance research. Newspapers, trade magazines and other mass-marketed publications would be excluded. During the 12-month period ending February 2006, research spending accounted for $1 billion in soft dollars, or about 9 percent of all equity commissions, according to Greenwich Associates.

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