Soft Dollars, the Non-Issue


New York – A recent article in Investment News sees irony in the SEC’s intense scrutiny of 12(b)-1 fees while paying scant attention to soft dollar commissions.  In our view, the SEC’s priorities are determined by realpolitik considerations which will continue to keep soft dollars on the back burner.

Investment News, a publication primarily targeted to financial advisors, ran a feature last Friday, “SEC targeting 12(b)-1 fees – but soft dollars fly under the radar” which contrasted the SEC’s interest in 12(b)-1 fees—a topic near and dear to its readership which receives benefits directly or indirectly from the fees—with soft dollars.

The article quotes Edward Siedle, founder of Benchmark Financial Services Inc: “Soft dollars are the exception to the basic rule that fiduciaries are not allowed to use client assets for their own benefit.  It’s never been clear that soft dollars benefit investors.” Described as a pension consultant, Siedle is a lawyer who provides litigation support for actions against investment managers, as well as due diligence and ‘forensic investigations’ of asset managers.

The article also quotes Russ Kinnel, Morningstar’s director of research, who complains about the level of soft dollar disclosure.  “They [mutual funds] disclose the commissions and whether some of that is soft-dollar money.  But the problem is that it’s in dollar terms and pretty well-hidden.”

Bill George, who has also contributed to this blog, is also quoted commenting on disclosure, “People can make all kinds of claims about what they’re using soft dollars for, but if you don’t disclose specifically for what, you can’t tell.”

While we support improved disclosure of soft dollar commissions, the reality is that the SEC has a very full plate.  Its first priority is recruiting additional staff with the additional funding it has received from Congress, followed closely by converting Dodd-Frank legislation into regulation.

The division most involved in parsing the Dodd-Frank legislation is the Division of Trading and Markets, which is also the division which typically takes the lead on soft dollar regulation.  The exception being the pending disclosure guidelines for fund trustees, which is the purview of the Division of Investment Management, which, as Investment News points out, is focused on 12(b)-1 fees and thanks to Dodd-Frank the registration of hedge funds.

So, unless some unwitting SEC examiner stumbles across a major soft dollar abuse, it is likely that soft dollars will continue to be a backwater issue for the foreseeable future.


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  1. My name is William (Bill) George. In the Investment News article mentioned in Sandy Bragg’s article (above) I’m identified by the article’s author, Dan Jamieson, as “a critic of soft dollars”. When I’ve discussed institutional soft dollar brokerage commissions with Mr. Jamieson, I’ve tried to impress upon him that I believe soft dollars, when used as intended under Section 28(e), have an appropriate function.

    My criticism of soft dollars relates specifically to the use of soft dollars in the bundled non-transparent and undisclosed brokerage arrangements between institutional advisors and full-service brokers.

    In my conversations with Mr. Jamieson I’ve emphasized that in contrast, to the soft dollars typically generated in bundled undisclosed brokerage arrangements with full-service brokers, soft dollars generated in brokerage commission arrangements with institutional third-party brokers* are disclosed and transparent. I’ve emphasized that the disclosure and transparency available in institutional third-party soft dollar brokerage arrangements provides regulators and clients with the opportunity to discover if the soft dollars are being used properly [i.e. within the safe harbor of section 28(e) and or within the advisor’s appropriate fiduciary discretion].

    On July 27, 2010 I filed a Comment Letter on the Proposed Rule: Mutual Fund Distribution Fees; Confirmations . I believe my Comment Letter explains my position on soft dollar brokerage quite clearly. I suggested that Mr. Jamison read my SEC ‘Comment Letter’ to better understand my position. It seems that for his article for some reason Mr. Jamieson wanted to ignore much of what I’ve told him about soft dollar brokerage.

    Further, I agree with Sandy that soft dollars will not be regulatory priority for the SEC for quite awhile. I’m surprised they are working on 12b1 fees. But, I guess they have to do something until FrankenDodd is fully implemented.

    * Sometimes called institutional agency third-party brokers or “soft dollar converters”.

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