Directed Brokerage Ban Not so Clear-Cut, Critics Say

Published March 15, 2004, 1:00 a.m. EST

Updated March 15, 2004, 1:00 a.m. EST

1 Min Read

NEW YORK - Soft dollars and directed brokerage are appalling and must be eliminated. Thats the tune weve been hearing almost uninterrupted for the last several months as regulators and lawmakers have unleashed the hounds on the fund industry. But not all are on board with the efforts to kill the practices.

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Many firms have some serious concerns with the possibility of the elimination of soft dollars for third-party research. Those that oppose the ban say the move would result in less innovative and independent research, which in turn would hurt investors.

TowerGroup also weighed in on the subject, saying the elimination of soft dollars would have a "distressing effect" on the brokerage and investment communities as well as possibly "paralyze" the industry and investors.

For a full version of this story see this weeks Money Management Executive edition.

While some changes may be necessary in the soft-dollar system, the evolution should not occur immediately or all at once, according to TowerGroup. Increased transparency in regards to these deals, while phasing out the usage of soft dollars is the way to go, the firm said. "Because soft dollars are so entrenched in the brokerage and asset management industries and their interoperation, the rapid elimination of soft dollars would constitute a hard landing for both industries," according to Robert Hegarty , the Needham,Mass.-based research and consulting firms vice president. Meanwhile, the Investment Counsel Association of America , whose membership consists of more than 300 investment advisory firms, urged the Securities and Exchange Commission to reject the

Investment Company Institutes

call for an all-out ban of third party research from soft dollar practices. Many at the Institute for International Researchs directed brokerage and soft-dollar practices forum here earlier this month argued that recent Congressional initiatives are misguided. A fund reform bill in the Senate is what is causing the uproar.