On July 1, Fidelity Investments began to phase out its use of soft dollars to pay for such market data services as earnings estimates and securities quotations, the company said. The company will continue to use brokerage commissions to pay for analyst research, however.
Fidelity wants to focus its use of soft dollars "on higher-value customized research, rather than including the widely available market information," a spokesman explained. Fidelity funds bought $160 million in research with commissions last year, $40 million to $50 million of which represented market data and similar services. The company continues to feel that market data is valuable for its fund managers, but it will now pay for these services out-of-pocket.
In March, Fidelity wrote a letter to the Securities and Exchange Commission urging the regulator to push for greater disclosure of soft-dollar use. "Our current thinking is that eliminating soft dollars would be complicated," the spokesman said. "We believe the SEC does not need to reach an agreement right now on whether to repeal safe harbor," he continued. "We recommended [in our letter] that the SEC recommend that funds disclose the costs of that research. But then the SEC should allow a period of time for funds to operate within the disclosure rules."
Also in March, MFS Investment Management announced that it would ban its use of soft dollars for research and other services altogether. Some industry observers suggested that if a number of large fund companies followed its lead, it could force broker/dealers to lower their trading commission costs, and to restructure or get rid of research teams. Meanwhile, smaller investment advisors could face higher costs for obtaining research, experts said.
When asked if Fidelity would consider banning soft dollars altogether like MFS, the spokesman said that the company has no plans to make further changes to its soft-dollar program, but that it is always evaluating its practices.
Those in favor of soft dollars fear that the move by the nation's largest fund company could encourage other brokerages to eliminate soft dollars, which, in turn, could cause insightful research by small research firms to dry up. The move by Fidelity could certainly portend a trend, as Fidelity's trades comprise a large portion of the commissions that mutual fund and institutional investors pay each year. Last year, Fidelity paid $815 million, or 53%, of the total $1.52 billion in commissions.
Meanwhile, a top SEC official indicated that the Commission will not move to ban soft dollars until 2005.
Copyright 2004 Thomson Media Inc. All Rights Reserved.