No Hard Line on Soft-Dollar Trading Deals

Securities regulators declined Wednesday to make it illegal for brokerages to include the cost of stock and bond research in their fees for trading execution.

The Securities and Exchange Commission voted 5-0 to outlaw the most glaring abuses of so-called "soft-dollar" arrangements, which include the exchange of computer hardware for trading business.

But the agency stopped short of enacting reforms sought by some large money managers, who wanted a hard separation of research and trading fees -- a practice known as unbundling.

The SEC's 5-0 vote, while approving clearer guidelines for what constitutes legitimate soft-dollar payments, implicitly stated that it's OK for Wall Street brokerage to include research costs into trading fee.

The commission commended some recent moves on Wall Street to unbundle, or disengage research and trading costs. But the SEC was unwilling to make unbundling mandatory, something that's sure to disappoint investor advocates who see soft dollars as an additional charge on trades.

"It's a lot of bark, but not a lot of bite," said David Easthope, consultant at research firm Celent. "There is not much to the new rule; it really just adopts what the industry is already doing. Essentially, it is a system where soft dollars are still legal, under these new standards. It is basically business as usual."

The issue of restricting soft-dollar practices, extra payments that are imbedded in the trading fees charged by Wall Street brokerages, has plagued Wall Street for some time now. Large money managers, such as Fidelity, contend soft-dollar arrangements, in many instances, increase their trading costs, something that hurts retail investors.

But the securities industry appears to be moving faster and more courageously than the regulators. A number of prominent money managers are demanding that brokerages separate the cost of paying for stock research from the commission they pay. While Fidelity is the only firm that has admitted to its agreement with Lehman, a number of other firms are rumored to have similar agreements. Some brokerages are finding that this process of unbundling may make sense and doesn't necessarily mean a loss of revenue.