Soft Dollars and Mutual Funds

Back to an industry I know. Mutual Funds. For years mutual fund companies have been stretching the definition of Research under the soft dollar safe window regulations. This allowed them to do business with X broker who would then pay for research related items like office space and computers for research analysts hired by the investment manager.

Recently this has drawn some attention and most firms have retreated from the extreme uses of soft dollars and many are phasing them out as the contracts come due annually for various services. Just in time for the SEC to propose changing the rules tightening up on the usage of soft dollars, handy how they work so closely together isn't it?

Funny thing I have seen happening. A number of vendors to the investment management community had these lucrative little arrangements where they classified their systems as 'research' and had them paid via soft dollars. Some went so far as to set up brokerage units that the clients would credit with trades so that the brokerage paid the cost of the system and not the investment manager.

The new rules wreck these arrangements so the vendors are up in arms and are making comments about the new rules. The investment managers are staying pretty quiet.

I would love to be hired to audit firms for thier uses of soft dollars. I know a couple of systems being paid for in this manner that are clearly NOT research despite all proclamations so I think I could easily receive settlements for the government that pay for the cost of hiring me and anyone else they need to assist and handle the legal work. I wouldn't even bother with the firms - just go to the vendors and have field day.