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NASD Panel Takes Aim at Soft Dollars

An industry board recommended stricter regulation of so-called soft dollars on Wall Street.

The National Association of Securities Dealers' Mutual Fund Task Force on Wednesday submitted its first set of recommendations to the Securities and Exchange Commission. The NASD panel is part of an effort to reform securities industry practices in the wake of last year's mutual fund market-timing scandal.

The SEC defines soft dollars as products and services that an investment manager receives from a broker-dealer in exchange for brokerage commissions. The task force was named last May to help advise the SEC on rule proposals regarding mutual fund cost disclosure and distribution arrangements. The aim is to eliminate possible conflicts of interest that could hurt fund investors.

"The Report of the Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs" represents the conclusion of the first phase of the task force's work. It recommends that the SEC:


  • Narrow the types of research services that may be obtained with soft dollars.
  • Expand the disclosure in fund prospectuses about soft-dollar practices and portfolio transaction costs.
  • Provide more explicit guidance about the types of information that fund boards should receive about soft-dollar practices and portfolio transaction costs.
  • Consider soft-dollar issues raised by other managed advisory accounts, such as hedge funds.

"When a mutual fund adviser obtains research with soft-dollar commissions, it's important that the benefits all go to investors and not to the adviser," said Robert Glauber, who is chairman of the panel as well as chief of the NASD. "The task force's recommendations limit research activities bought with soft dollars to those that clearly benefit investors and require that advisers give more complete information on soft-dollar practices to fund boards. These changes will help protect investors and are in the interest of the mutual fund industry."

Other members of the 21-person committee include Vanguard Group CEO John Brennan, MFS Chairman Robert Posen, Legg Mason CEO Timothy Scheve and Franklin Resources co-CEO Martin Flanagan.

The second phase of the task force's assignment, which will focus on mutual fund distribution arrangements, is expected to take several months to complete.

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