New Attack on Soft Dollars?


Fidelity Investments, the nation’s largest mutual fund company, has decided to respond to shareholder criticism and will stop using soft dollar commissions to pay for some expenditures.

Starting July 1, Fidelity plans to start paying for market data services, including ILX, Bloomberg, and Reuters quote systems with cash instead of soft dollars.  Internal sources suggest this will cost Fidelity between $40 million to $50 million this year.  Fidelity executives explain that the firm is in discussions with brokers to return commissions set aside to pay for market data services, where it will lower investor expenses.

It is important to note that Fidelity is not changing the way it pays for investment research — the lion’s share of its soft dollar budget.  Fidelity noted that last year it paid $815 million in equity commissions, of which $160 million was paid out in soft dollars for market data and research services.  This means that Fidelity paid between $110 million and $120 million in soft dollars for research and related services.

This move by Fidelity is not really surprising as many in the industry expect that  tightening up the definition of what can be paid for using soft dollars is an appropriate course of action.  This news also SHOULD NOT be taken to indicate that Fidelity has thrown in the towel on paying soft dollars for independent investment research.  In fact, it could be viewed as an attempt by the nation’s largest mutual fund company to lead the way and establish “best practices” regarding soft dollars BEFORE being forced into a course of action by the regulators.

It should also be remembered that in March of this year, Fidelity sent a letter to the SEC arguing that the real problem with soft dollars was the way Wall Street brokerage firms “bundle” their research into their trading commissions without breaking down exactly what an investor is paying for.  Fidelity argued that disclosing these costs would lead to a more competitive environment and lower costs.

As we have always argued, getting rid of soft dollars, while therapeutic, will not really address the real problem associated with paying for research.  Soft dollars SHOULD ONLY be eliminated WHEN AND IF regulators also force Wall Street to unbundle its research product from equity trading commissions.  Only then will great research from independent firms compete on an equal footing with the highest quality research from the Wall Street research departments.

Comment by Research Snoop:

This move is unsurprising, but–it has oft been noted–Bloomberg and its ilk should take heed and are perhaps already teetering on the brink of a collective corporate nervous breakdown. Now that the Fireman’s Local #105 and every other investment pool has been forced to reckon with constituent questions regarding soft dollars, some of the worst and most inane abuses will likely be cut–by the fund complexes if not by the regulators. Indeed, those with an inkling of the SEC’s current ongoing investigation into soft dollars tell this snoop that the likeliest outcome of that probe would be a 28(e) curtailment of items like Bloomberg, Reuters and other news services not specifically oriented at providing true market research. If the SEC is generous, they’ll pretend that rent, cars and hotel stays haven’t also been expense in the past, despite noting those gross violations in their 1998 report.


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