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Portfolio > ETFs > Broad Market

Greenwich Associates Study Finds Fewer Soft Dollars

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GREENWICH, Conn. (–Use of “soft dollars” for equity research and services declined last year in anticipation of regulatory actions restricting such purchases, according to a survey of U.S. investment managers and mutual funds by Greenwich Associates LLC.

The Greenwich Associates report based on the survey said that U.S. soft dollar volumes fell 18% in 2003, or 11% of overall equity commissions, to US$1.24 billion.

Greenwich Associates consultant John Colon said in a statement accompanying the release of this survey that as the perception of regulatory concern “takes hold, we expect to see even deeper cuts in the future, either in the form of across-the-board reductions in soft-dollar usage, or in a paring back of the types of research and services purchased with soft dollars.”

It isn’t only in the United States that regulators are concerned that research and services routinely are purchased in a manner opaque to investors. On May 7, the U.K. Financial Services Authority said it is “acting to promote efficiency and transparency in U.K. securities markets by limiting the scope for softing and bundling to execution services and investment research.” The statement was a follow-up on a consultative paper it had published a year before (see Previous HedgeWorld Story).

Although the survey from Greenwich Associates was of U.S. firms only, the statement references the United Kingdom, as well, saying that the stated goal of both regulators is to reduce costs for investors.

The statement recommended that both regulators move deliberately, taking into account the reluctance of many market participants to spend hard dollars on research and the effect that a ban or strict limitations on soft dollars might have on its providers.

“An alternative approach focused on enhancing transparency will ensure that we don’t toss the baby with the bath water,” said a Greenwich Associates spokesman cited in the statement.

Perhaps in response to similar such sentiments, the FSA’s announcement May 7 did have a wait-and-see aspect to it. It said the FSA anticipates a market-based initiative led by the Investment Management Association to develop an improved system of disclosure that clearly identifies charges for research. It plans to assess in December whether the industry’s work on enhanced transparency and disclosure is on track and, if not, what further regulatory action will be necessary.

The FSA has also made public a study it commissioned from Deloitte & Touche, LLP, assessing the economic impact of a switch to hard-money financing of research. That auditor found groundless fears of a mass exodus of fund management business offshore in such a case.

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Contact Robert F. Keane with questions or comments at:

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