March 11, 1994
TO: INVESTMENT ADVISERS COMMITTEE NO. 21-94
SEC RULES COMMITTEE NO. 31-94
SOFT DOLLARS TASK FORCE
RE: MARKET 2000 REPORT RECOMMENDS ENHANCED SOFT DOLLAR
DISCLOSURE
__________________________________________________________
The SEC Division of Market Regulation's recently released Market 2000
report contains a discussion of soft dollar practices, including the Division's
recommendations for enhanced disclosure requirements concerning soft dollar
arrangements. A copy of this portion of the Report is attached.
The Report warns that Section 28(e) of the Securities Exchange Act (which
provides a safe harbor for certain types of soft dollar arrangements) does not
relieve money managers or brokers from their best-execution responsibilities "nor
does it provide a shield from the antifraud provisions of the federal securities
laws." The Report notes certain concerns that have arisen with respect to soft
dollar practices, including possible conflicts of interest where brokers are
chosen not based on their execution skills, but for their willingness to provide
services for soft dollars. The Report indicates that, based on these conflict
of interest concerns, the Division believes closer scrutiny of soft dollar
practices by representatives of managed accounts and by regulators is warranted,
especially when soft dollar and directed brokerage arrangements comprise a
significant portion of commission payments.
In addition, the Report concludes that "it is appropriate to require
advisers to disclose quantifiable information to its [sic] clients, including
more specific information regarding the research and other services an adviser
receives through a soft dollar arrangement." In the Division's view, any
additional disclosure requirements should include explicit statements about
possible conflicts of interest created by soft dollar arrangements. Also,
according to the Report, such disclosure requirements should apply
equally to services obtained from "in-house" or third party firms, and
appropriate regulators should consider whether these additional disclosures also
should apply to banks acting as investment advisers.
Thomas M. Selman
Assistant Counsel
Attachment