New York – Will Edick of Pickard and Djinis LLP has pointed out that we were incorrect in our earlier assertion that proprietary investment banking research is exempt from the new Department of Labor (DOL) ‘soft dollar’ commission disclosure requirements. Proprietary research is not exempt, and must be disclosed along with third party alternative research. Nevertheless, the disclosure requirements are potentially much less onerous for proprietary research than for third party research. For this reason, we continue to believe that pressure from pension funds and pension consultants will have an adverse effect on alternative third party research. We have seen third party research increasingly offered in a bundled fashion, similar to proprietary research, and we expect this trend to continue.
Our original article on this topic, published on Monday May 3rd, erroneously stated that proprietary research was exempt from the new DOL requirements, and has been corrected. We were arguing that the playing field between proprietary research and third party research has gotten even more skewed because of the new regulations. That was too harsh. The playing field remains as unlevel as before.
Third party research, which historically has been more transparent in its pricing, can be readily disclosed under the new guidelines. Asset managers can relatively easily estimate the portion of third party research costs which are applicable to any given pension plan client, or provide a formula for calculating the portion of third party commissions which were used for research. The DOL decided this ‘may not be practical’ for proprietary research, which will be allowed to be described in generalized terms.
The original article argued that the new DOL guidelines would exacerbate two trends which we have explored in previous articles: 1) pressure from the pension community to reduce usage of third party research because of a flawed understanding of soft dollars, and 2) more third party research offered on a bundled commission basis. We softened that slightly to say that the new DOL requirements will do nothing to abate these trends.
This, however, is a debatable point. Will Edick of Pickard and Djinis LLP believes that the upside of the new DOL requirements will be a better understanding among the pension funds and pension consultants that commissions paid for proprietary research are also a form of soft dollars. He points out that the DOL is now the second regulator (the first being the SEC in 2006) to clearly state that bundled commissions paid for proprietary research require scrutiny as a form of soft dollars.
Mr. Edick, along with his colleague Lee Pickard, have distributed on behalf of the Alliance in Support of Independent Research an excellent overview of the new Department of Labor (DOL) requirements as they relate to ‘soft dollar’ commission disclosure, which can be viewed at http://www.alliance-research.org/PDFs/Memo-ScheduleC-Form5500.pdf. The memo raises some interesting points which we will cover at another time.
While we agree that the new DOL disclosure requirements could improve understanding, we doubt that they will. Nevertheless, we are happy to be proven wrong, and, as we have just seen, it won’t be the first time…