Changing transatlantic practices on soft dollars, making it harder to win analyst coverage?

It is not often that new rules and best practices are set by the UK that other countries are happy to follow. However following the publication of the FSA guidelines on soft dollaring on July 25th, the SEC has followed suit. This has the potential to make it harder for issuers to win analyst coverage, as the business model of equity research changes.

When the FSA issued the guidelines, it noted “We continue to have discussions with SEC staff on issues connected with dealing commissions”. Those discussions have resulted in the SEC’s consultation published last week. It remains open for 30 days.

Soft dollars cover services beyond execution, provided to investment managers by broker-dealers, which are then “paid for” by the investment manager in the form of inflated commissions and guaranteed order flow. In the US, the practice is covered by a safe habour rule 28e of the ’34 Act.

Since plan sponsors (pension funds, corporations etc) foot the bill for investment managers’ use of the research services, acquired with soft dollars, questions have arisen as to whether the clients actually benefit from the research. Commissions are also usually bundled, with no clear divide between the commissions for execution, research and technology.

The SEC proposals will allow fund managers to continue to pay for genuine research services with commissions, but computer hardware, travel and entertainment, rents and salaries would be exclude, potentially raising the costs of sell side research.
And of course, this raises the bar again for foreign listed companies seeking to raise capital in the US, and developing still further the need for broad investor communication.