More Guidance Please


New York – A recent study by Greenwich Associates “Equity Buy Side Favors New Guidance on Commission Disclosure”, June 2007, discusses the attitudes of plan sponsors and money managers towards their understanding of 28(e) safe harbor rules and their interpretations.

The study found that about 60% of money managers and 67% of plan sponsors felt that greater intervention by the SEC would be helpful in determining what is required in terms of disclosure of the split between execution and research costs paid to brokers.

What is clear from the study is that the money managers and the plan sponsors have spurious interpretations and practices aimed at the disclosure of commissions. For example, 35% of the money managers and over 50% of the plan sponsors say that they report their overall commission spending to their clients. However, only 25% of the money managers and 20% of the plan sponsors indicate that they split out the research portion of the commissions.  As for proprietary research, only 27% of the money managers and 3% of the plan sponsors indicated that they report the cost of proprietary research.

Given these statistics, it is clear that the interpretation of the safe harbor rules are not well understood.  This, despite the thorough, though voluminous, interpretive guidance provided by the SEC last summer.

Disclosure is a cake walk, however, compared to Chairman Cox’s espousal that soft dollars ought to be abolished entirely. Granted, this would be fair to investors and make the SEC’s job much easier in this area, but the economic impact of this change is almost unimaginable.  We feel that there are no teeth behind this “lofty ideal” of Christopher Cox, because in a move of this magnitude, the investor would certainly suffer much more grief in lost profits, than they would gain in knowing specifically what they are paying for commissions.

The Greenwich study goes further to discuss the expected impact of disclosure on information flow and other factors. Here a large majority of money managers thought that the disclosure of commissions would help the firms in a marketing sense, but slightly less than half thought that disclosure was an effective commission management tool. About 40% of money managers and plan sponsors thought that disclosure could lead to higher management fees.

When asked what impact the disclosure of commissions might have on the alternative research industry, 25% of the plan sponsors and 33% of the money managers thought that it would increase the use of alternative research.

Comment by Bill George:
Square-One (for A Level Playing Field)

Now I get it! It’s all about soft dollars and hedge fund regulation.

If you are trying to fathom the latest moves by the Chairman of The SEC, The Investment Company Institute (ICI) and other industry lobbyists, put them all in the context of going back to square-one to create “a level playing field” between regulated advisory structures (mutual funds, pension plans, and bank trust departments) and hedge funds.

The SEC lost in its effort to regulate hedge funds (because the court decided the SEC didn’t have jurisdiction) and at the same time the ICI was pressuring for mandated action on the use of client commissions by hedge funds (a level playing field). Nobody got what they wanted.

The only way to reach the desired ends, apparently, was to punt the whole issue to Congress for a rewriting of the regulations relating to the appropriate use of institutional client’s brokerage commissions [aka Section 28(e)]. Hopefully, in the rewriting process, the U.S. Congress will see the importance of specifically mandating disclosure and transparency and the regulation of bundled undisclosed services in institutional brokerage commission arrangements.

For clues to this motivation read two curiously similar letters submitted to the SEC on what was scheduled to be the last day of the comment period on the Interpretive Guidance Regarding The Use of Client Commissions Under Section 28(e) of the Securities Exchange Act of 1934. The two letters, both Dated September 7, 2006, are: (1) from Elizabeth Krentzman, General Counsel of the Investment Company Institute, and (2) from Darrell Braman, Henry Hopkins, Chief Legal Counsel, et, al. of TRowe Price Associates, Inc. To see these letters, go here.


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