New York—As the SEC considers new commission disclosure guidelines, the question is how far will the SEC go? The benchmark is the commission disclosure regime instituted in the UK by the Financial Services Authority in 2006, and now being adopted in other domiciles. Given the SEC’s tepid enthusiasm for commission disclosure, it is likely that US guidelines will be less far-reaching than those implemented in the UK and now spreading across Europe. This view is reinforced by a recent email from the securities industry trade association SIFMA indicating that both securities firms and investors are trying to persuade the SEC that less is more as far as disclosure is concerned.
The email is the follow up to a meeting organized earlier this month by SIFMA with SEC staff. The meeting included investors who discussed how they used soft dollars. According to the email, the buy side representatives stressed that they set the prices for research based on their perceived value of the research, which “hopefully will lead [the SEC] to conclude that a sell side cents per share type of unbundling would not be useful information.” In other words, instituting disclosure requirements similar to those in the UK and France would not be appropriate in the US. Apparently not discussed was the impact that client commission arrangements are in fact creating sell side cents per share type of unbundling, at least for the smaller and mid-sized broker research which is flowing through the arrangements.
One of the big concerns within the securities industry is that unbundling of research will lead to sales tax. Up until now, the bundling of research with execution has helped to shield proprietary research from sales tax. Independent research, which for the most part tends to have explicit pricing, is subject to sales tax.
The email concludes that the SEC should provide guidance that research is “a component of integrated services provided through soft dollar arrangements, and that additional burdens or costs should not be imposed on providing such services.” That is, the new rules should confirm the current state of affairs and not bother with any intrusive new disclosure guidelines. Given that the IM division has many other competing priorities such as 12b-1 fees and hedge fund regulation, why not give the staff more excuses to keep commission disclosure buried in the inbox?
In a recent speech, Andrew Donohue, Director of the SEC’s Investment Management division, suggested that commission disclosure guidelines are likely to be focused on fund directors rather than broader based disclosure (click here to see our discussion.) This, plus the lobbying from SIFMA and the mutual fund trade association, indicates that any US commission disclosure regulation will fall short of European standards.
The text of the SIFMA email follows:
Given IM Director Buddy Donohue’s background as a General Counsel to two major fund complexes, it is not surprising that the SEC is focusing on enhancing the type of qualitative and perhaps quantitative disclosure that is made to fund boards in conjunction with soft dollar arrangements. These disclosure enhancements may also flow to other types of advisory clients through amended Form ADV, Part 2 disclosure. The SEC staff, while not specifically confirming the content of the revised ADV Part 2, has made a point, in the context of soft dollar discussions, of underscoring their intention to finalize their ADV rule in the near future.
Much of the meeting was devoted to buy side representatives relating their views on how they approach, value and analyze soft dollar arrangements. This discussion seems to validate the view which many in our group have expressed over the years that providers of soft dollar services tend to be price takers, rather than price setters, and that the “value” of the research component is very much in the eyes of the beholder. It seemed that the SEC staff understood this, and hopefully will lead them to conclude that a sell side cents per share type of unbundling would not provide useful information. In turn, such a conclusion might be helpful in addressing potential state tax issues, at least in the proprietary context.
The point was also made that that from a policy standpoint, it would be helpful if the SEC, in the context of rulemaking or interpretive guidance, would clarify that research is a component of integrated services provided through soft dollar arrangements, and that additional burdens or costs should not be imposed on providing such services.