Cox Sees Soft Dollars As Crucial to Investors


New York, NY – Yesterday, SEC Chairman Cox and the four other SEC Commissioners, appeared before the House Financial Services Committee to answer questions about various issues regarding investor protection, market efficiency, and capital markets formation.

Countless questions were posed by the committee members during the four hour marathon meeting, though committee members seemed to express the most concern about U.S. competitiveness, class-action lawsuits and the issue of secondary liability, hedge funds and naked short sales, shareholder access to company proxies, and the requirements for small companies under the 2002 Sarbanes-Oxley law.

In addition, the topic of 12-b1 fees and soft dollars came up a few times, with Chairman Cox putting these issues in the framework of investor disclosure and clarifying regulations regarding mutual fund fees and expenses.  This was evident in Chairman Cox’s prepared remarks on these topics (included below).

“Another of our important initiatives to benefit individual investors is our drive to improve the quality and clarity of mutual fund and 401(k) disclosure, which we have undertaken along with other departments and agencies, including the Department of Labor. Forty-seven million Americans now have 401(k) accounts through their employers, and these and other defined contribution plans now represent over $3 trillion in assets. These investments embody the hopes and aspirations of millions of Americans for a secure, decent retirement. But the disclosure that the individual investor receives about what is in the 401(k) is typically inadequate – often nothing more than one-page charts that contain extremely limited information. What is needed is clearly presented information that makes it far easier for busy Americans to understand the expenses they are being charged in connection with their investments, and the returns they are actually getting compared to an appropriate index. This sort of simplified disclosure should be readily available to every 401(k) plan participant.

Nearly half of the $3 trillion that Americans have invested through defined contribution plans is in mutual funds, so we are hard at work on a simplified, plain English disclosure for mutual funds that gives investors what they need to know, in a form they can use. We are focused on a new, streamlined disclosure document for investors that will provide better information about investment objectives, strategies, risks, and costs. Ideally, that information could be made available online, or in writing – as the investor prefers. We are also considering making information about funds and the brokers that sell them available at the point of sale.

This is not just a matter of clearer writing, but also of clarifying our regulations concerning mutual fund fees and expenses. So the Commission is conducting a thorough review of mutual fund fees and expenses, and the disclosure of these costs to investors. That review includes an examination of the $12 billion that investors now pay each year in Rule 12b-1 fees. Just last week, the Commission held a roundtable to focus on the future of Rule 12b-1.

With the same objectives in mind, the SEC has intensified its focus on “soft dollars” that brokers receive from mutual funds to pay for things other than executing brokerage transactions. Recently, the Commission acted unanimously to publish interpretive guidance that clarifies that money managers may only use soft dollars to pay for eligible brokerage and research services – and not for such extraneous expenses as membership dues, professional licensing fees, office rent, carpeting, and even entertainment and travel expenses. At the same time, we are examining the adequacy of current accounting and disclosure for soft dollars.”

It was interesting that during the question and answer period, Cox was asked why he had asked Dodd and Franks to repeal or revise the 28(e) safe harbor, particularly after the Commission had issued its interpretive guidance last summer.  Cox explained that ultimately only Congress could deal with the inherent conflicts of interest associated with the practice and the difficulty of administering soft dollars.

Cox, however, was quick to admit that the letter he sent to Dodd and Franks was a reflection of his own views, and not that of the other Commissioners or the staff.

At one point in the proceeding Chairman Cox explained that he felt that “predictability and clarity in rulemaking” should be a critical hallmark of the Commission’s regulatory efforts.  We found this comment to be particularly ironic given the recent confusion and unpredictability that has been created by Cox’s request that Congress repeal or revise 28(e).

We also found Cox’s comments that Congress needed to step in to deal with the topic of soft dollars a little confusing, as the SEC has complete authority to establish a new level of commission disclosure and transparency — a development that would clearly be in the best interests of investors.

Despite all this, we found that the SEC and Chairman Cox revealed very little new insight about their views and plans about soft dollars at yesterday’s House Financial Services Committee meeting.


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