Noting that soft dollars are a ``witches brew’’ of hidden fees and conflicts of interest, SEC Chairman Christopher Cox has asked Congress to repeal or at least substantially revise the statutory safe harbor for soft dollars. In 1975, in order to facilitate the adjustment from fixed commissions to the new era of competition, Congress enacted Section 28(e) of the Exchange Act to allow investment advisers to pay higher than market rates for brokerage commissions as a way to cover the cost of research. The SEC chair said that the market considerations that gave rise to soft dollars are as out of date as the leisure suit. His remarks were delivered to the National Italian-American Foundation in NYC.
Since its passage in 1975, Section 28(e) has never been substantively amended; and many observers do not believe that it will be now. But even if it is not, the SEC chair has vowed that the Commission will continue to monitor the abuses in order to bring hidden soft dollar expenditures to light and ensure that, to the maximum extent possible, soft dollars are used only for research. The broad goal is to help investors get the information they need in a form they can readily use and understand.
Section 28(e) provides a safe harbor so that money managers do not breach their fiduciary duties solely on the basis that they have paid brokerage commissions to a broker-dealer for effecting securities transactions in excess of the amount another broker-dealer would have charged, if the money manager determines in good faith that the amount of the commissions paid is reasonable in relation to the value of the brokerage and research services provided by the broker.
Section 28(e) governs the conduct of all persons who exercise investment discretion with respect to an account, including investment advisers, mutual fund portfolio managers, fiduciaries of bank trust funds, and money managers of pension plans and hedge funds.
Conduct not protected by Section 28(e) may constitute a breach of fiduciary duty as well as a violation of the federal securities laws, particularly the Investment Advisers Act and the Investment Company Act.