New York—In a speech given to the mutual fund industry last week, the Director of the SEC's Division of Investment Management signaled that the focus of the SEC is on giving guidance to mutual fund boards on soft dollar commissions. The implication is that this will be the priority, not broader commission disclosure.
Andrew (Buddy) Donohue, who heads the Investment Management division of the SEC was the keynote speaker last Thursday at the Investment Company Institute 2007 Operations and Technology Conference. Among other topics, Donohue discussed soft dollars, indicating that guidelines for board members were in the works: "As a next step, the Division staff is currently working to provide a recommendation to the Commission that would provide guidance to assist mutual fund boards in their oversight responsibilities in this area." He cited the 'virtual unbundling' being caused by broader use of electronic trading platforms, as well as that U.S. firms are also reacting to the commission disclosure requirements from the Financial Services Authority in the UK. Both trends are rapidly changing the nature of soft dollars.
Donohue indicated that the goal of the SEC is to help directors keep pace with the latest developments with soft dollars: "Our goal is to provide fund boards with helpful guidance to assist them in monitoring the conflicts of interest inherent in soft dollar arrangements, while being careful to avoid recommending guidance that will adversely affect the evolution of the trading markets in an unintended way." He said that the SEC is currently meeting with interested parties to understand the issues in preparation for developing specific recommendations.
The speech signals an approach to commission disclosure which is more circumscribed than that taken by the FSA in the UK, or more recently by the Autorité des marchés financiers (AMF) in France. The focus on fund directors leaves open the question of what, if anything, would be required to be disclosed to clients.
The relevant except from the speech is included below and the full text can be found at http://www.sec.gov/news/speech/2007/spch101807ajd.htm.
Remarks Before the Investment Company Institute 2007 Operations and Technology Conference
by
Andrew J. Donohue1
Director, Division of Investment Management
U.S. Securities and Exchange Commission
Washington, D.C.
October 18, 2007
Soft Dollars
Another very important initiative that the Division is developing concerns soft dollars. In 2006, the Commission issued an interpretive release that, among other things, provided guidance with respect to what qualifies as execution and research services that may be purchased using soft dollars under section 28(e) of the Securities Exchange Act. As a next step, the Division staff is currently working to provide a recommendation to the Commission that would provide guidance to assist mutual fund boards in their oversight responsibilities in this area.
Again, in line with the theme of this conference, soft dollars is a great example of how technology has impacted business practices in the fund industry. For example, firms are increasingly employing new technologies in their brokerage practices, such as the increased use of electronic trading platforms and execution systems. These new technologies are making it easier for advisers to more accurately determine the cost of best execution and as a result more precisely value the cost of the research and brokerage services obtained with soft dollars. Additionally, the use of new technologies has created increased transparencies and is allowing greater opportunities for "virtual unbundling" of research and execution services. We are also seeing potentially favorable current market trends such as an overall decline in commission rates and increased internal reporting of meaningful information on trading practices to fund boards.
In addition, U.S. firms are reacting to new regulatory requirements in other jurisdictions, such as the FSA's requirements in the UK that research and execution be unbundled. Thus, the area of soft dollars has become a fast moving target. In order to get the lay of the land in this area, we are speaking with advisers of all sizes, independent directors and directors' counsels to make sure we get our recommendation right. Our goal is to provide fund boards with helpful guidance to assist them in monitoring the conflicts of interest inherent in soft dollar arrangements, while being careful to avoid recommending guidance that will adversely affect the evolution of the trading markets in an unintended way.
We expect to provide the Commission with a recommendation in this area shortly.
Posted at 11:18 am by Sanford (Sandy) Bragg
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