Regulator set to introduce soft-dollar paper

(February 3, 2005) The Canadian Securities Administrators is about to release for comment a discussion paper on soft-dollar arrangements.

The long-awaited report could be made public as early as Friday, said Cindy Petlock, the Ontario Securities Commission’s manager of market regulation at a Strategy Institute conference in Toronto today. Canadian regulators have been studying the controversial topic for nearly two years.

“There’s unanimous agreement that these issues should be approached through consultation in a discussion paper, instead of immediate rulemaking or amendments,” said Petlock.

“Soft dollars” refers to the concept of using a percentage of brokerage commissions to pay for goods and services other than order execution, usually research, explained the OSC’s assistant manager of market regulation, Susan Greenglass, during a panel discussion.

In typical soft-dollar arrangements, part of the commission paid to a dealer is directed to a third-party service provider. But bundled services are also often referred to as soft-dollar arrangements.

In Canada, only Ontario and Quebec currently have policies governing such arrangements. The OSC allows “investment-making decision services,” such as advice on the value of securities, analysis and research reports and related software. In addition, the OSC requires that mutual fund prospectuses or annual information forms must include disclosure relating to soft-dollar arrangements.

There are a number of issues with soft-dollar arrangements relating to the definition of allowable services, Greenglass added. “Some have suggested that we need clarification. For example, hardware, software, newspapers and magazines have been included. But that interpretation has also been stretched to include conferences and seminars in exotic locations as allowable services.”

Although Greenglass stressed the OSC is only seeking general feedback at this point, and will not recommend specific regulatory changes, the paper will ask some fundamental questions on soft dollars, such as whether the scope of services allowed should be limited or clarified and if additional disclosure should be required.

The paper will be released for comment for 90 days, but it’s unlikely regulators will ban soft dollars, as some in the U.S. and Britain have suggested. “Our focus is on limitations,” said Petlock. “The sense that we are getting is that a ban is not the way to go.”

In the U.S., the Securities and Exchange Commission is currently reviewing soft dollar arrangements, as is the National Association of Securities Dealers. Advisor.ca will have more on developments south of the border on Friday.

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