Execs: Disclosure Beats Eliminating Soft Dollars

Article excerpt

Despite the request by Securities and Exchange Commission Chairman Christopher Cox that Congress eliminate soft-dollar safe harbors, industry insiders argue that such a change would produce nothing but toil and trouble for investors.

The real antidote to what Mr. Cox called "a witch's brew of hidden fees" is simple disclosure, according to a survey of 43 institutional investment managers and 37 plan sponsors conducted in April by the Dallas broker-dealer Capital Institutional Services Inc. and the Connecticut consulting firm Greenwich Associates.

But when it comes to what that disclosure might look like, investment managers and plan sponsors alike are looking back to regulators for the magic ingredients.

"There is a general feeling among market participants that current 28(e) regulations regarding research and brokerage provides value, but current disclosure practices are ambiguous and inconsistent," Kristi Wetherington, chief executive of Capital Institutional, said in a white paper her firm and Greenwich Associates published.

Passed in 1975, Section 28(e) of the Securities Exchange Act of 1934 frees money managers from the fiduciary responsibility of always choosing the lowest-cost brokers, provided that the higher commissions buy research that helps managers make higher-quality decisions for their investors.

Soft-dollar spending, which accounts for about $11 billion of commissions a year, has been the subject of scrutiny for several years. In the past some commissions had been directed to purchases not in the best interest of investors - things ranging from vacations to college tuitions for managers' children.

Last year the SEC passed guidelines that delineated how that money could be used. Spending for research was in, but using commission fees for office space, or telecommunications lines used to access research, was out.

And even though everyone understands the rules, not everyone knows how commission dollars really are spent, since there is no uniform method of reporting the totals. Only 35% of the managers who participated in the survey said they report to clients the total commissions paid, and only half of plan sponsors ever ask.

"Ultimately, the reason plan sponsors aren't pushing this is that they really don't understand," said Michael Mayhew, the chairman and CEO of Integrity Research Associates LLC in New York.

In theory, the chief investment officers of plan sponsors would agree that understanding those plans' expenses is part of their function as fiduciaries, but in practice, commissions remain an opaque, and relatively minor, part of their jobs, Mr. Mayhew said. "While it is an important issue, when you look at all the other jobs they have running these large plans, on the list of 20 things to do, it's probably 21st."

In fact, 7% of the investment managers surveyed said that they feel intense pressure from their internal management and fund directors to disclose fees, while 45% said they feel no pressure at all from sponsors, and as of April, 44% said they felt no pressure from regulators. …