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New Study Finds Buy Side Wants Guidance Around Soft Dollars

According to a new research study from Greenwich Associates, the majority of investment managers and pension plan sponsors surveyed are in a favor of a more comprehensive regulatory framework around the disclosure of client commissions paid for equity research.

According to a new research study from Greenwich Associates, the majority of investment managers and pension plan sponsors surveyed are in a favor of a more comprehensive regulatory framework around the disclosure of client commissions paid for equity research.At a Tuesday briefing on the study, which was sponsored by Capital Institutional Services (CAPIS), Greenwich Associates consultant John Feng said the survey aimed to uncover whether investment managers were consistent in disclosing to clients their commission spending. In addition, the study asked what changes investment managers and pension plan sponsors would like to see happen around the SEC's Section 28(e) rule and what role they would like to see regulators play in setting a framework for disclosure guidelines.

The Section 28(e) rule was adopted in 1975 to govern a money manager's use of client commissions to obtain research or brokerage services. Earlier this year it was amended through an Interpretive Guidance issued by the SEC to provide a more specific definition of what qualifies as eligible research or brokerage and confirming that the rule applies equally to arrangements in which a manager receives proprietary research through bundled arrangements and those in which independent or third party research are received.

Feng said that among the plan sponsors, 55 percent said that mandatory disclosure of commissions for both research and trading would benefit them and ultimately their participants. And 86 percent of plan sponsors said investment managers should be required to disclose the total amount of commissions they pay to brokers.

But Feng said that while the majority of the buy side participants favored more disclosure they stopped short of advocating the unbundling of research, like what Fidelity started to do in 2005.

"If you cut off the soft dollars completely it changes the buy and sell side relationship complete," he explained. "They would be a need to find other means of paying for research, such as raising fees." Feng added that it would then become a "size issue" with the larger plan sponsors and investment managers potentially having the advantage.

Kristi Wetherington, CEO of CAPIS, said that while regulatory framework is necessary, it's important that the requirements aren't too onerous on the investment managers and the costs are reasonable. She adds that Section 28(e) is "working very well" and allows for smaller research firms to compete with the big guys.

She adds that the Fidelity model doesn't seem to be catching on across the industry and instead investment managers and pension plan sponsors report not feeling pressure to change their disclosure policies. The study found that less than 20 percent of investment managers feel strong pressure from clients for greater levels of disclosure and only seven percent say they feel pressure from regulators.

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