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News September 19, 2005 Issue

SEC to Issue Soft Dollar Interpretative Release This Week

Will raw data feeds still be softable? What about mixed use products?

We’ll find out this week.

On September 21, the SEC is set to issue an interpretative release containing guidance on the scope of brokerage and research services covered by Section 28(e). The Commission plans to seek public comment on its interpretations. "The interpretive release is designed to provide guidance to securities industry participants on money managers’ use of client commission dollars to pay for research and brokerage services under Section 28(e)," said the SEC’s announcement. "The release also reminds industry participants of the statutory requirements for client commission arrangements under Section 28(e)."

While the release will tell us what’s softable and what’s not, it is not expected to discuss investment advisers’ obligations in disclosing soft dollar arrangements, nor is it expected to require advisers to provide additional transparency on the costs of soft dollar arrangements.

In fact, the release is expected to address soft dollars primarily from the perspective of the Division of Market Regulation. The Division of Investment Management, however, is expected to weigh in on various disclosure and transparency issues in a subsequent rulemaking.

Still, whatever Market Reg says is going to be big news in the investment management space.

"Everyone is monitoring this," said Morgan Lewis partner Steven Stone. "The guidance has the potential to impact the structure of the soft dollar industry."

Here’s what we should look for when the guidance comes out, according to Stone:

  • Whether the SEC follows the November 2004 recommendations of the NASD’s Mutual Fund Task Force.
  • Whether the SEC moves toward unbundling (whether they "push hard" on brokers to disclose the cost of services they are providing, Stone explained).
  • Whether the SEC truncates the types of things that are research and brokerage. "The concept of research and brokerage services are terms of art," said Stone. Historically, "anything that is useful in the investment decision-making process" has sufficed. However, he noted that the U.K. Financial Services Authority has leaned toward excluding raw data feeds from the definition of softable research. "The question," said Stone, "is whether [the SEC] will follow suit."
  • Whether the SEC will interpret the "provided by" standard under Section 28(e) to limit the type of multi-broker arrangements that have emerged since the SEC gave guidance on the area "several decades ago."
  • Whether the SEC says anything about third-party arrangements, "particularly since some firms have either voluntarily or in the context of enforcement matters said that they would forgo third-party arrangements."