CCOs will be under scrutiny on soft dollars

Examiners are likely to put you on the spot regarding soft dollars, fund experts say, even as increased regulatory scrutiny dampens their use.

John Gilner, CCO at T. Rowe Price, concurs, because of the importance to both the adviser and the fund board of getting best execution. “That to me is a pretty fundamental compliance issue, and it is an issue which boards are very concerned about right now, the ones that really are paying attention to what's going on in the market,” says Gilner. Last month, the Independent Directors Council, an offshoot of the Investment Company Institute, recommended that the SEC adopt a rule requiring broker-dealers to unbundle commissions and put a value on proprietary research.

“It is entirely possible, and in the view of many desirable, that this will lead to the eventual elimination of the use of soft dollars in the mutual fund industry,” James Bodurtha, chairman of the IDC, wrote in a letter to SEC chairman William Donaldson.

Bodurtha says adopting the IDC recommendation could “create a market environment where we can say to our traders, ‘Well, you guys are paying X for this. Is it worth it?' And they can say, ‘Yes, it is,' or, ‘We're not going to buy it anymore now that we know what it actually costs us.'”

Directors are asking hard questions about just who benefits from the research paid for by fund commissions, Allan Mostoff says. The adviser “may be using that research for other funds, it may be using it for its institutional clients, it may be using it for its private clients,” he says.