CSA publishes soft-dollar paper

(February 8, 2005) The Canadian Securities Administrators has published for comment a comment paper on soft-dollar arrangements. As reported last week on Advisor.ca, the paper takes no stand on the sometimes-controversial arrangements, but instead outlines scenarios — both pro and con — and asks respondents to answer a series of probing questions.

Under typical soft-dollar arrangements, a portion of the brokerage commission goes to pay a third-party provider for certain goods or services, such as research.

“One argument in favour of soft-dollar arrangements is that their use allows independent research providers to compete with large full-service firms that provide bundled execution and research services, an extremely important factor in today’s environment where independent research has become a priority,” the CSA notes in its concept paper.

“Those in favour of soft-dollar payments have argued that there are benefits to the practice, although there may be room for abuse at present,” the paper continues.

“Many believe that soft-dollar payments should be expressly limited to paying for third-party research services or technology services which provide direct input to the decision-making process of the advisor, and supporters of the concept have suggested that the only rule change that is required is to clarify the scope of services allowed and to limit those services which are considered to be investment decision-making services.”

That suggests Canadian regulators are not considering an outright ban on soft-dollar arrangements, which was hinted at by Cindy Petlock, the Ontario Securities Commission’s manager of market regulation, at a Strategy Institute conference in Toronto last week.

“Our focus is on limitations,” she said. “The sense that we are getting is that a ban is not the way to go.”

The concept paper points out that advisors using soft-dollar arrangements may have difficulty meeting their obligations to clients if there are issues surrounding disclosure, or if the selection of dealers may be biased due to the existence of such arrangements.

“There are a number of potential conflicts of interest associated with soft-dollar arrangements that may not be directly linked to best execution,” the CSA says. “In general terms, conflicts of interest arise in any situation where there are incentives or practices that create the potential for an advisor’s interests to be put before a client’s interest. Any use by an advisor of commissions for its own benefit would be a conflict of interest.”

The paper also provides some recent regulatory history on soft-dollar arrangements in the U.S., Britain and Australia, and asks a number of questions directly related to soft dollars, such as:

• How does an advisor ensure that such arrangements are consistent with general obligations to clients?
• Should there be additional disclosure requirements?
• Are there practical impediments to splitting commission payments into order execution and “investment decision-making services”?

Comments on the paper will be accepted until May 6, 2005.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com