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Wednesday, December 17, 2003

ICI Pushes Forward With Soft Dollar Recommendations

by: Nicole Halsey

In response to the reactions of small broker-dealers to its call to reform soft dollar contributions and third party research, The Investment Company Insitute issued a new statement defending its reccomendations.

In the statement, Matthew Fink, chairman of the ICI said,

“The ICI’s members are trying to change a conflict-ridden system. Research, third party or otherwise, which is valuable to investment managers should be able to stand on its own, and not be subsidized through soft dollars,” he said. “Our proposal which requires investment advisers to pay for research directly will eliminate potential conflicts and help restore investor confidence. To assert, as some have, that our proposal could undermine the global settlement on securities industry research is nonsensical.”

The group also released its formal recommendations in a letter to SEC Chairman William Donaldson. Regarding soft dollars, the institute suggested that the SEC adopt a revised interpretation under Section 28(e) of the Securities Exchange Act that would exclude certain products and services from the scope of the safe harbor under Section 28(e). These products and services would include:

  • Computer hardware and software, and other electronic communications facilities, used in connection with trading or investment decision-making;

  • Publications, including books, periodicals, newspapers and electronic publications, that are available to the general public

  • Third-party research services.

    The ICI also called for the Commission to adopt a rule under Section 206(4) of the Investment Advisers Act that would prohibit registered and unregistered investment advisers from using client commissions to pay for services or products that fall outside of the safe harbor under Section 28(e) of the Exchange Act. The agency said such a move would create greater transparency among fees and ensure that all investors are treated equally.

    Also, the Institute recommended that the SEC and NASD adopt new rules and amend existing rules to prohibit fund advisers from considering the sale of fund shares when selecting brokers to execute trades in securities held or to be acquired by a fund. The Institute acknowledged that NASD rules already prohibit this, but felt that revisiting the issue would handicap conflicts of interests.

    The ICI also recommended that the SEC adopt a rule that would ensure that the use of a broker that sells shares of a fund to execute trades in that fund’s portfolio securities would not, by itself, subject the fund to potential liability.  

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