Caisse to ban soft dollars

(December 22, 2004) One of the country’s largest money managers is banning soft dollar commissions on equity and derivatives trading. The Caisse de dépôt et placement du Québec says the move will take effect January 1, 2005.

“In this regard, the Caisse is following the best practices recommended by various international supervisory bodies,” the financial institution said in a statement.

Soft dollar commissions are a component of brokerage fees rebated by institutional brokers, in the form of credits, to professional money managers, typically pension and mutual fund managers. The credits are used to purchase goods and services managers need to run their business, such as research reports and other investment-related services.

The Caisse — which manages public and private pension funds in Quebec and has assets of nearly $90 billion — says when it needs such services, they will be paid for directly from its operating budget, “thereby increasing the transparency of securities trading costs.”

In Canada, it’s estimated that institutional investors spend $70 million a year on soft dollars.

It’s not clear yet whether other pension funds will follow the Caisse’s lead. The Ontario Securities Commission (OSC) is investigating soft dollars arrangements and expects to release a discussion paper on the topic in the new year.

Susan Han, senior vice-president and general counsel at AIM Trimark Investments, says she expects that at the very least, regulators will eventually require increased disclosure of soft dollars, which are usually mixed in with brokerage commissions, and not broken out separately.

“I think the trend will be toward more disclosure at the very least, because that’s what everyone is calling for, including the OSC, Britain’s Financial Services Authority and the U.S. Securities and Exchange Commission,” Han told Advisor.ca earlier this year. “They have all said we need better disclosure and it’s pretty difficult to argue against that.”

Although Han says she believes better disclosure would be less disruptive to the industry that an outright ban, increased transparency could mean an end to soft dollars, as large institutional money managers may simply decide to circumvent any potential problems and voluntarily end the practice, as the Caisse has done.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com