The Association for Investment Management and Research (AIMR) is reviewing members' written responses to a set of soft-dollar standards recently proposed by an AIMR blue-ribbon task force.
As of mid-February, however, only a "handful" of members responded, said Linda Rittenhouse, vice president for advocacy, legislative and regulatory affairs at the AIMR, a Charlottesville, Va.-based trade group representing 60,000 members at buy-side firms using soft dollars.
Still, AIMR's executive board, which created the task force, tentatively plans to present the standards to its board of governors this month. A response period gives members time to comment and suggest changes to the current standards.
Pending approval of the standards which contain both mandatory and voluntary provisions the board will then choose a date to put them into effect and urge members to adopt them.
Ethical Principles
The standards, or ethical principles as the AIMR also called them, include a voluntary statement of compliance for investment managers. The statement would require investment managers to provide their clients with statements vouching that any brokerage arrangements involving clients are consistent with the overall standards.
The task force was created last August, following growing concern over negative public perceptions of soft-dollar practices. The Securities and Exchange Commission conducted its own nationwide sweep last year of firms engaged in soft-dollar practices.
"If we didn't address this, others would have," Rittenhouse told Traders Magazine. "The train was leaving the station without the AIMR on board."
The controversy over soft dollars is rooted in a safe-harbor provision, Section 28(e) of the Securities Exchange Act of 1934, which Congress enacted in 1975.
Section 28(e) was meant to protect investment managers against claims they had breached their fiduciary responsibilities using higher client commissions to acquire investment research.
According to the task force, "a fair amount of legitimate confusion" has been the result. The confusion stems from a considerable expansion in the soft-dollar area, both in actual usage and the types of products and services for which safe-harbor protection is claimed, the task force noted.
Terms of Reference
The blue-ribbon panel had a wide term of reference, probing, for instance, whether soft dollars should actually be eliminated, and if elimination would result in the unbundling of brokerage and research services.
The panel looked at developing uniform definitions, as well as the need for uniform disclosure by an investment manager; the importance of treating proprietary research the same as third-party research; and the need for investment managers and their clients to understand the fiduciary principles in directed brokerage.
The proposed standards define a soft-dollar arrangement as one in which "the investment manager directs transactions to a broker, in exchange for which the broker provides brokerage and research services to the investment manager." Such arrangements include proprietary and third-party research agreements, but exclude client-directed brokerage arrangements.
The work of the blue-ribbon panel was painstaking, of course. Coming up with a practical definition of soft dollars was just one of several challenges.
Despite a tight deadline, the panel made impressive headway, identifying "allowable" research, establishing standards for soft-dollar use, creating "model" disclosure guidelines and providing guidance for client-directed brokerage arrangements.
For example, there are standards relating to relationships with clients. An investment manager would be required to "disclose to the client that it engages in soft-dollar arrangements prior to engaging in such arrangements involving that client's account." The panel recommends that the investment manager "should assure that, over time, all clients receive the benefits of research purchased with client brokerage."
"The AIMR is a very strong voice for industry ethics," Rittenhouse said. "It is incumbent upon us to take the lead in addressing soft dollars. No one has been looking at the issue from the investment-manager's viewpoint."
Cooperation
The task force enlisted the cooperation of the SEC. Douglas Scheidt and Catherine McGuire, chief counsel in the SEC Division of Investment Management, and chief council in the SEC Division of Market Regulation, respectively, participated as observers.
The SEC observers simply acted as "touchstones," according to Rittenhouse. They were consulted, for instance, on whether the panel's work was relevant to the abuses sought in the commission's soft-dollar sweep.
"Other SEC staffers were very helpful, either by raising issues which needed clarification or were overlooked," said Rittenhouse. "But in no way did they try to direct the outcome."
