Soft dollar probe creating

(September 10, 2004) Independent U.S. financial research firms are suffering from the recent scrutiny of soft dollar arrangements, a newly-released survey suggests. But at this point, it’s not as big an issue in Canada, says the head of a Toronto-based independent research company.

The U.S. Securities and Exchange Commission (SEC) has launched a task force to study soft dollar arrangements, where a portion of brokerages commissions is rebated by institutional brokers, in the form of credits, to professional money managers, amid allegations that the credits may have been abused in the past and used for more than just research.

Investorside, the U.S. trade association for independent research firms, says a recent survey of its members reveals “a dramatic chill” in the independent research industry as a growing number of money management firms are reducing their commission payments to third-party independent research because of uncertainty surrounding the SEC’s investigation.

In fact, 95% of firms surveyed in August said they were being affected by the soft dollar probe and 65% have postponed hiring workers for that reason.

“The most alarming result of the survey was that 70% of those responding would consider exiting the business if soft dollars were banned altogether,” the survey concludes.

Michael Jantzi, president of Michael Jantzi Research Associates, says although the soft dollar issue has been raised here from time to time, he hasn’t heard of any push to outlaw the arrangements, although there have been rumours that Canadian regulators are closely watching developments south of the border.

“It’s not a concern for us because we don’t do a huge amount of business in the U.S.,” he adds. “But it will affect us.”

Jantzi does admit that soft dollar arrangements can be abused. “Much of the time they were undertaken in a very secretive manner. So I think the process can absolutely be improved through transparency and disclosure.

That’s essentially the same argument made by Investorside, who met with the SEC this week to discuss their survey and to champion independent research, which they say has helped protect investors from corporate fraud.

While the trade association doesn’t want to see soft dollar arrangements banned, it also supports increased transparency and disclosure. “What investors don’t need is a continuation of the hidden, subterranean bundled commissions that have encouraged abuse in the past because it was impossible to oversee or audit who was paying for what in the undisclosed pool of trading commissions,” says Investorside chair John Eade of Argus Research in New York.

“We support the SEC in requiring transparency from all research providers so that investors can see where their commission dollars are going.”

Jantzi agrees. “If you want to foster independent research and an industry that is free of conflicts of interest from the investment banking community, why would you target one of the very things that supports independent research?”

“Soft dollars serve a purpose so you don’t throw them out just because some people might be abusing them or because they might have been abused in the past,” he adds. “It’s short-sighted to say you have to get rid of the whole thing.”

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