In a move designed to restore industry confidence and nudge investors interests back to the forefront, the Investment Company Institute told the Securities and Exchange Commission Monday that it supports the curtailing of soft dollars and banning of "directed brokerage."
"These are substantial reforms," said ICI Chairman Paul G. Haaga Jr. The proposed changes would "benefit fund investors by substantially diminishing potential conflicts of interest and strengthening the operating integrity of mutual funds."
"Soft money," which refers to credit money given to fund managers from commissions, can be used for research. However, it has become apparent that this money is often used for questionable purposes, such as the purchasing of computers and software and conducting of third party research. The ICIs proposal would narrow the broad field of "research" purposes.
Making "directed brokerage" practices illegal would diminish the chance of investors best interests not being the primary concern. In other words, the dismantling of "directed brokerage" would disallow the hypothetical "ABC Fund Firm" from selecting "DEF Brokerage Firm" just because "DEF Brokerage Firm" sells "ABC" funds.