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Soft Dollars: SEC To Issue Final Release Guiding Industry Toward Greater Transparency

The SEC held a hearing on soft dollars yesterday that may result in what experts say could be the final step in the Commission's scrutiny of soft dollars. The SEC began discussing revisions to the practice in 2004.

The goal of yesterday's hearing was to offer mutual fund directors tools and guidance for obtaining information from investment advisers on how they use soft dollars, which have given rise to client commission accounts (CCAs) and commission sharing arrangements (CSAs).

Although the release has not been made public, experts who have been actively following the SEC's stance on soft dollars -- such as Kelly Abernathy, General Counsel and Chief Compliance Officer of institutional agency brokerage and independent research provider CAPIS -- watched the hearing via live Web cast.

Kelly Abernathy
Kelly Abernathy

Abernathy says the goal of the release, which will be made public when posted in the Federal Register in a few days, is to help the industry more appropriately disclose how it uses soft dollars. "It is a way to have further understanding and disclosure about the practice," she notes.

Abernathy adds that there were no surprises. "They haven't said anything new in terms of changes to 28(e). This was more of a guidance or framework for mutual fund directors to know what they need to be looking for and how they should ask for information from advisers," she says.

The SEC said it would not put out a one-size-fits-all rule about obtaining information, but rather that it would be flexible and simply encourage dialogue between directors and advisers, according to Abernathy.

Abernathy says she expects the SEC to release a list of sample questions for mutual fund directors to use as a guideline to obtain information from their advisers on their practices. It will also state what types of information mutual fund directors should be looking for from their advisers. "It doesn't have to go down to each individual trade level -- this is more about transparency and what are the practices and procedures of the investment advisers," Abernathy comments.

Andrew "Buddy" Donohue, Director of the Division of Investment Management at the SEC, was one of the panelists addressing the Commission during the hearing. He explained to the Commission why this guidance would be necessary and helpful, Abernathy relates.

Abernathy says, "It's no secret that the SEC has been working on this guidance."

The release that will be made public in a few day complements a 2006 SEC release that bifurcated the soft dollar issue into two segments. The first, which was the focus of the 2006 release, stated what was eligible and appropriate regarding the practice of soft dollars. The second part, which was the focus of yesterday's hearing, was aimed at transparency.

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