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New York, NY - According to an article published by Dow Jones Newswire last night, SEC Chairman Christopher Cox recently proposed to senior members of congress that they consider eliminating the legislative protection for "soft dollars".


The Details

Apparently, in a letter sent last week to Senate Banking Committee Chairman Christopher Dodd, and House Financial Services Committee Chairman Barney Frank, Cox suggested that a "legislative fix" might be warranted with regards to the soft dollar issue. 

Cox explained his views to a Dow Jones writer saying that he thought the commission was hindered in its ability to truly reform soft dollar practices given current laws that are in place. Consequently, Cox felt that an outright ban of soft dollars would be preferrable.

One of the concerns Cox has about soft dollars is that the arrangement might encourage money managers to trade excessively with client assets to generate soft dollar credits.  In addition, Cox was concerned that some asset managers might direct trades to trading desks to pay for their research, despite the fact that they did not offer "best execution".  Lastly, Cox expressed concerns about money managers potentially using the soft dollar commissions generated from one client's account to benefit other clients' portfolios.

It must be noted that the views expressed by Christoper Cox were not those of the Commission, nor were they reflective of what the other four Commissioners might think on this topic.  Cox is expected to elaborate on his views on the subject in a speech in New York today (Thursday).


What This Means

These comments by SEC Chairman Cox must be considered extremely important as the banning of soft dollars would have a significant impact on the financial services industry -- both to the alternative research industry AND securities firms as ALL commissions above and beyond the cost of execution is technically (legally) considered "soft dollars".

However, as we evaluate Cox's current comments on soft dollars versus his recent statements on the same subject, it becomes clear to us that the SEC Chairman is frustrated with his inability to substantively reform these practices -- particularly the issue of providing investors with commission disclosure.

In fact, a cynic might conclude that Cox's statements are part of a strategy to reengage the industry on this topic and try to get both the securities industry and the mutual fund industry to seriously consider supporting a meaningful disclosure regime.

Historically, this was exactly what happened in the UK after the delivery of the Myners Report when Paul Myners recommended a mandatory unbundling of equity commissions.  Of course, the industry saw this approach as the worst of all possible outcomes, thereby making commission disclosure a more palatable solution.

Consequently, we see Chairman Cox's remarks as important as he is clearly indicating that he is not satisfied with leaving the soft dollar issue alone, but that he wants to address many of the various conflicts of interest associated with soft dollars by fostering greater commission transparency. 

Ultimately, Cox is looking to fulfill his duty of SEC Chairman by helping investors make better investment decisions by providing them with clear information about how their assets are being managed and spent.