The Securities and Exchange Commission (SEC) has defined “soft dollar” practices as arrangements under which products or services, other than execution of securities transactions, are obtained by an investment adviser from or through a broker‐dealer in exchange for the direction by the adviser of client brokerage transactions to the broker‐dealer. In the wake of the mutual fund scandals of 2003, soft dollar practices have come under increased scrutiny by the SEC, the U.S. Congress, and others. This article is based on testimony presented by the Investment Counsel Association of America (ICAA) to the U.S. Senate Committee on Banking, Housing, and Urban Affairs at a hearing on soft dollars held on March 31, 2004. The article outlines the following positions: (1) the SEC should ensure that there is adequate disclosure about soft dollar practices, combined with appropriate inspection and enforcement of regulations governing such practices; (2) the consequences of abolishing soft dollars ‐ an outcome that would require Congressional action ‐ most likely would affect smaller investment advisory firms adversely, create entry barriers for new investment advisory firms, and diminish the quality and availability of proprietary and third‐party research; (3) investment advisers should be required to keep appropriate records relating to soft dollar arrangements and to develop and implement internal controls and procedures designed to ensure that soft dollar arrangements are supervised, controlled, and monitored; and (4) eliminating the use of soft dollars for third‐party research would harm investors, diminish the availability of quality research, provide a regulatory‐driven advantage for full‐service brokerage firms, disadvantage third‐party research providers, and result in less transparency to investors, regulators, and market participants.
Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited