New York—Yesterday the SEC issued draft guidance for directors of registered 40 Act funds relating to ‘soft dollar’ practices. In the ‘sunshine’ meeting in which the commissioners discussed the proposed guidance, it was clear that the SEC itself, exemplified by Chairman Christopher Cox, has some confusion on the subject. Yet it is asking fund directors, already overburdened with multiple other responsibilities, to take up the mantle. After failing to come up with any meaningful soft dollar disclosure guidance in its Form ADV proposals, the SEC is now trying to pass the ‘soft dollar’ buck to the fund directors.
Shockingly, Chairman Cox, after three years on the job, still doesn’t understand soft dollars. He still thinks of soft dollars as extra commissions paid for third party research, and refers to soft dollars as ‘almost a billion dollars.’ Someone should inform the Chairman that, in fact, soft dollars includes payments to broker dealers for proprietary research and totals between $4 and $5 billion in the U.S.
It is also clear that the Chairman’s intent with the new guidance is to strong arm fund directors into banning soft dollars. His opening remarks illustrated his ongoing hostility to soft dollars, and he repeatedly suggested that directors should ‘rein in’ the use of soft dollars. He concluded with two ‘examples’ of how directors might respond to the guidance: 1) they might limit the use of soft dollars or 2) they might prohibit soft dollars.
Perhaps if the Chairman understood that over 90% of advisors pay some form of soft dollars for research he would have a more nuanced view of the situation. Then again, perhaps not. The issue is somewhat moot since the Chairman will be leaving soon. However, it does raise the question: if the Chairman of the SEC doesn’t understand soft dollars, how can you expect fund directors to understand it? This is the problem the SEC has set itself, aggravated by the fact that the SEC has done precious little to improve the overall disclosure of soft dollars.
Fund directors have a lot on their plate. During yesterday’s open meeting, SEC staff described how fund directors are being given large ‘books’ of trade data, and have little sense of how to interpret it. The SEC staff repeatedly used the adjectives ‘overwhelmed’ and ‘befuddled’ to describe fund directors on the topic of execution generally and soft dollars specifically. In theory, the 38 page draft guidance will provide assistance directors in cutting through the confusion. We’ll give a considered response once we’ve gone through the draft in detail. However, the risk highlighted by Commissioner Atkins in his questions to SEC staff is that this becomes one more ‘check the box’ item given cursory attention.
Finally, those of you in the alternative research industry (independent research, if you prefer) should pay close attention to this current proposal. If Chairman Cox had his way, this proposal would be a back door route to banning or limiting soft dollars. His influence may be limited, but the sentiments die hard. Comments on the proposed guidance must be received by the SEC by October 1st. The full document can be viewed at http://www.sec.gov/rules/proposed/2008/34-58264.pdf. The webcast of the sunshine meeting can be viewed at http://www.connectlive.com/events/secopenmeetings/.