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News November 22, 2004 Issue

NASD Task Force Recommends Modest Soft Dollar Reforms

Not surprisingly, the NASDís Mutual Fund Task Force, led by NASD staff but comprised of industry participants, has recommended relatively modest soft dollar reforms.

As expected, the group suggested that the definition of research be narrowed to incorporate a new "intellectual content" standard. It also recommended that fund boards receive more information on fund brokerage, and that soft dollar disclosure be added to fund prospectuses.

But faced with the thorny issue of whether to attempt to unbundle full service brokerage commissions, the Task Force just said no.

Apparently, it wasnít an easy decision. "Ultimately, the Task Force was unable to reach a consensus on this point," said the report. "The views of the Task Force members reflect a sharp disagreement on the value to fund boards, and ultimately to investors, of estimates of the amount of proprietary research obtained with fund brokerage commissions." Several industry sources applauded the groupís candor in acknowledging the internal debate on the unbundling issue.

The report, dated November 11 but publicly released November 15, quickly was praised by the ICI and SIA. In particular, the ICI said it was pleased that the Task Force recommended that the SEC make compliance with Section 28(e) mandatory for "all discretionary investment advisers." (Back in December 2003, the ICI similarly had urged the SEC to turn the 28(e) safe harbor into a rule applicable to "all investment advisers.")

Independent research providers generally were pleased with the report, with the exception of the recommendation that advisers provide fund boards with the dollar amount spent on third-party research. The Task Force emphasized that that recommendation was "not meant in any way to disparage the value of third-party research." In other respects, the group strongly endorsed the parity of third-party and proprietary research.

Advisers that soft Bloomberg will be pleased by a sentence in the report indicating that the groupís proposed definition of research "would protect research and database services that allow a subscriber to conduct customized research using various analytical tools." Moreover, the Task Force appeared to take the view that Bloomberg-related hardware and software should be protected: The suggested definition of research would exclude "computer hardware and software" but only those "unrelated to any research content or analytical tool" (however, some industry lawyers were not clear whether this was intended to apply to Bloomberg terminals). The Task Forceís proposed definition of research also would exclude phone lines and data transmission lines, as well as terminals and similar facilities distinct from any research content or analytical tool.

Of course, the groupís recommendations are not binding on the SEC, and it remains to be seen what the agency will do with them. Clearly, many in the industry would like the SEC to follow the lead of the Task Forceís report.

Will it? During a November 19 American Bar Association meeting, SEC Division of Market Regulation director Annette Nazareth said that she found the Task Forceís recommendations "very helpful."