New York – We often discuss the posture of the SEC and FSA towards soft dollar transactions on these pages. Today we will discuss the treatment of soft dollars in other countries. In Asia, the main exchanges are in Hong Kong, Singapore and Australia. In Europe, we will look at Ireland and in North America we will look at Canada.
In Hong Kong, fund Managers and brokers are managed by the Securities and Futures Commission. Hong Kong fund managers must execute orders on the best available terms, according to the existing market conditions. Services received by money managers must be of “demonstrable benefit to the registered person’s clients”. Softable items include research and execution: including economic and political analysis, portfolio valuation tools, performance measurement, market analysis, market data, quote vendor services, investment publications and clearing services. Not permitted items include: travel, accommodations, entertainment, G&A expenses, Office Equipment, salaries and direct money payments. As well, the soft dollar arrangement must be consistent with achieving best execution for the client.
In Singapore, regulation is headed up by the Singapore Monetary Authority (central bank). The guidelines are directed towards “managers of collective funds”. The criteria for allowing soft dollar transactions include: services reasonably expected to assist the manager in providing investment advice and the manager must not engage in unnecessary trades to qualify for soft dollars. The manger is strictly forbidden from accepting cash rebates. As with most regulations on the topic, the manager is charged with finding best execution.
Australian soft dollars are regulated by the Australian Securities and Investment Commission. As well, the trade group Investment and Financial Services Association is involved in giving guidance to its members on soft dollar usage. In terms of exclusions cash rebates are restricted, the money manager must believe that the benefits to client outweigh the additional costs, upon the clients request, the money manager’s soft dollar policy should be made available to clients and supporting records, There should be a written agreement between the money manager and the softing broker that discloses the services and rate that will be in effect.
Ireland’s Soft dollar arrangements are regulated by the Central Bank of Ireland. The Bank’s Handbook for Investment and Stockbroking Firms requires that soft dollar arrangements are to in writing only. The soft arrangements are acceptable if the benefit of the services are commensurate with the costs, The broker must agree to deal in the clients best interests, where the broker acts as the principal in a trade, it must be at a price at least as good as available elsewhere.
Canadian soft dollar regulations are very similar to those in the US given the cross-border securities trade flows between Canada and the US. The main difference is that financial market regulation is housed under provincial control, rather than federal government or the central bank. Here the main regulatory body is the Ontario Securities Commission, with the Quebec Securities Commission taking a distant second place. The two bodies are tightly integrated, so the regulations are entirely consistent.
Obviously there is a good deal of commonality among the various regulatory bodies internationally as regards the soft dollar regulations. What is somewhat spurious is the ownership of the regulatory responsibility. For Singapore and Ireland the central bank is the regulator, For Hong Kong and Australia, the federal government is the regulator, for Canada, regulation is under control of the provinces.