Thought Winter 2008

SEC Proposes Guidance on Soft-Dollar Practices

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The SEC's proposed guidance regarding funds' soft-dollar practices puts the spotlight on funds' boards of directors, prompting the question: Will the final guidance push boards beyond the scope of their traditional oversight role?

The U.S. Securities and Exchange Commission (SEC) recently published for comment a proposed guidance to mutual fund boards of directors regarding their duties in overseeing fund trading practices of funds' investment advisers. Among other issues, the guidance focuses on how fund boards should assess advisers' use of fund brokerage commissions to pay for research and other services beyond trade execution, otherwise known as "soft dollar" practices.

The proposed guidance states that it does not intend to introduce any new or additional requirements on fund boards, recognizing that it is not feasible to impose a "one size fits all" approach to fund board oversight of such practices. Mutual fund industry groups are skeptical, however, concerned that the proposal's language could be interpreted to extend boards' oversight role beyond its traditional scope. In addition, some say that the proposal inadvertently creates an impression that soft-dollar practices are per se unsuitable, ignoring the practical and beneficial role these practices can play in the overall operation of a fund.

Proposal Highlights
Whatever form the final guidance takes, its current iteration suggests that fund boards evaluate adviser's soft-dollar procedures and policies, and methods for addressing potential conflicts of interest. Its lengthy outline of information a board should request from an adviser when conducting such oversight includes:

How an adviser determines the types of research received for soft dollars
Methods for establishing a soft-dollar budget and making brokerage allocations
Process for ensuring that research or products acquired with soft dollars qualify for the safe harbor available under Section 28(e) of the Securities Exchange Act of 1934
How soft-dollar products and services are allocated among clients
Evaluation procedures for mixed-use products and services o How selection of broker-dealers is impacted by use of client commission arrangements, if applicable

To stay current regarding the SEC's activity on this and related subjects, visit their Web site for regular updates at: http://www.sec.gov/spotlight/emergencyactions.htm

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