(July 15, 2005) Before the debate on soft dollars starts, there should be agreement about what the term means, IFIC says. They may complicate matters, but soft dollars arrangements don’t create barriers to best execution.

So says the mutual fund industry association in a recent comment letter on the Canadian Securities Administrators’ concept paper addressing those two key issues. The association conceded soft dollar arrangements can make it more difficult to measure best execution, since they blur the bright line defining which parties are paying for execution-related services, but added they also help fund a research apparatus that allows dealers to provide superior trades.

“The benefits of soft dollars to mutual funds and their investors are typically discounted or entirely overlooked,” IFIC said. To eliminate some of the confusion, it offered the idea of unbundling research and transaction services and noted regulators in the U.S. and U.K. have been considering similar changes.

“With bundling in place it is virtually impossible to accurately calculate the costs, effects and issues associated with soft dollars,” IFIC said, “and by extension, virtually impossible to fairly and reliably determine the appropriate policy direction and standards that should be applied to their use.”

Further, the association said there are inconsistencies in the definition of soft dollars. In some cases, firms have publicly stated they do not use soft dollars, when they in fact do, but only for proprietary research. IFIC also said CFA’s definition of soft dollars being used to pay for “trading-related goods or services” does not properly convey the scope of how such funds are used by firms. The association suggests any meaningful debate on the issue must have as its starting point a consistent definition of how soft dollars are allocated, both in Canada and worldwide.

The CSA published its soft dollar paper for comment in February. The document takes no stand on the sometimes controversial arrangements, but instead outlines scenarios — both pro and con — and asks respondents to answer a series of soft-dollar related questions.

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    • Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com

    (07/15/05)