Will The SEC Ever Move on Commission Transparency?


New York, NY – In recent weeks rumors have been swirling around the financial markets that the Securities and Exchange Commission will imminently release its long awaited proposal promoting the disclosure of how money managers are spending client commissions to purchase execution and research services.

The SEC Becomes A Follower Rather Than Leader

In many ways the SEC has taken an extremely reactive rather than proactive approach to this issue as both UK and Canadian regulators have already taken courageous steps to address commission transparency.

However, it is a sad state of affairs that the SEC is not even the first US regulator to try and promote commission transparency as the Department of Labor Employee Benefits Security Administration (EBSA), the regulator of ERISA plans, recently approved regulation which, when and if implemented in 2008, would require the unbundling and separate valuation of brokerage and research services provided to pension funds.

Hoping Commission Transparency Goes Away

Of course, many in the financial markets have been secretly hoping that the SEC would ignore the whole issue as commission transparency would create additional pressures to an industry that has already undergone a sea change in recent years.

However, the commission transparency issue is not going away anytime soon as any in the global financial community have come to realize that investment managers have a fiduciary obligation to do a better job of overseeing how their client’s assets are being spent.

Arbitrary Disclosure

Unfortunately, there are some who argue that promoting transparency would not be good for investors as it would actually force money managers to make “arbitrary estimates” of how much they were spending on research and execution services — a development that would be “illusory” and potentially would “mislead or confuse investors”.

Of course, this argument is somewhat spurious as investment managers in the UK and much of Europe are already making these “good faith estimates”, while the Canadian Securities Authority is looking to mandate a similar move.

Task Force Recommendations Revisted

In fact, some suggest that the SEC plans to continue sticking its head in the sand by avoiding to promote commission transparency of any kind, instead adopting a watered down version of disclosure akin to the recommendations made by the Mutual Fund Task Force in November of 2004.

After considerable arguments why transparency was not possible, the Mutual Fund Task Force recommended the following:

“Rather than requiring funds to provide quantitative estimates of soft dollar use, the Task Force recommends that the SEC require funds to provide shareholders with additional information concerning the fund’s soft dollar practices. As discussed above, Item 15(c) of SEC Form N-1A already requires a mutual fund to disclose in its SAI how the fund selects brokers and, if a fund considers the receipt of research services in selecting brokers, the nature of the services. The Task Force recommends that the SEC expand these disclosure standards to require, in addition, that a fund state:

  • Whether it obtains third-party research through soft dollars; and
  • Whether it obtains proprietary research through soft dollars.

Task Force members generally agreed that this additional disclosure should be included in the fund prospectus and not be relegated to the SAI. Prospectus disclosure will make the information prominent and readily accessible to investors and the financial press, encouraging a heightened scrutiny that is unlikely if the information is set forth in the SAI. To ensure that the information is useful to investors, the Commission should require funds to present the information clearly and simply, in a manner that avoids boilerplate language or needlessly lengthy or complex explanations.”

Of course this would be extremely disappointing as the Commission would actually be taking a step backwards, when compared to its peers in much of the rest of the world.  However, maybe the SEC is hoping that the DOL actually passes its proposed regulation, making an aggressive move by the SEC a moot point.


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