Yesterday’s SIA Soft Dollar Conference provided a venue for legislators and proponents to express their views and to re-establish positions on the controversial topic of soft dollars. Of note, the SEC’s Larry Bergmann indicated that the issue was under review and that a report to SEC Chairman William Donaldson would be completed by year-end. However, Bergmann stated that “We should not be taking rash action or taking action which has unintended consequences”.
Among the unintended consequences of any change in the soft dollar legislation is the impact on the independent research community who are typically paid in soft dollars. However, it somewhat paradoxical that any delay in a decision by the SEC is clearly detrimental to the indie research industry as uncertainty over the future of soft dollars has had a definite “chilling effect” on the industry. This uncertaintly has prompted many buy-side players to sit on the sidelines and avoid using soft dollars, thereby dramatically reducing their purchases of indie research. Other money managers have voluntarily banned the internal use of soft dollars.
It is interesting to note that given the strictures of recent legislation (the global research settlement) forcing sell-side companies to offer independent research to their clients, the SEC would be ill-advised to make any changes which would harm the independents.
In the SEC’s tome on the soft dollar industry “Inspection Report on the Soft Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds” the SEC states that the “Research is the foundation of the money management industry” and that “Providing research is one important, long standing service of the brokerage business.”
Conference attendees agree that any legislation is not likely to be forthcoming this year.
The challenge for the SEC will be to craft guidelines which will not undermine the research portion of the soft dollar business, while curtailing the froth in the business. To this end, Bergmann indicated that “Research is defined in the statute to mean: advice, analyses and reports … it doesn’t say anything about carpeting, it doesn’t say anything about airline tickets.”
The coming legislation will need to be carefully crafted to support the use of independent research in the financial markets, but to create an environment of transparency in the reporting of trading commissions.