An Unintended Consequence of the Imposition of Competitive Commission Rates: A Boom in Soft Dollars1
Stanley Sporkin and other members of the securities and Exchange Commission staff got an unpleasant surprise in the months following the elimination of the fixed commission system on May 1, 1975. Here's why:
Stanley and his associates had long deplored -- since the sixties -- certain ways many brokerage firms attracted commission business from mutual funds. Stanley felt it was acceptable for a brokerage firm, like Donaldson, Lufkin & Jenrette, to get orders from a mutual fund by supplying the fund's advisors with information and opinions about stocks. However, Stanley did not, for example, approve of what Glore Forgan did for the advisors to Investors Overseas Service, a mutual fund that invested in other mutual funds.
In 1966, Glore Forgan Staats Inc. received more than a million dollars a month in commissions from Investors Overseas Service (a fact that was, naturally, hidden from reporters). Glore Forgan kept only about half that money. At the end of each month, Glore Forgan received a directive from IOS listing firms and people with whom they should share the commissions they received. Without question, Glore Forgan would write and send the checks.
Some checks went to firms and people who had supplied IOS with information that helped IOS invest more productively. But most of the checks went to brokers and brokerage firms that had sold IOS funds to investors. This was done so as to legally circumvent the Investment Company Act of 1940 which limited the amount of money mutual funds could pay brokerage firms and brokers who sold their funds.
Many other brokerage firms and mutual fund advisors engaged in this