CONFERENCE CALL: AIMR: TELL CLIENTS OF SOFT-MONEY DEALS

New guidelines proposed by the Association for Investment Management and Research should help institutional investors get more information about soft-dollar arrangements between their money managers and brokers — but they probably won’t give money managers adopting them a marketing edge.

The voluntary guidelines simply ask money managers to disclose details of their soft-dollar relationships with brokers, but do nothing to discourage such deals.

(Soft-dollars are a barter arrangement in which money managers direct trades to certain brokerages in exchange for in-kind commission rebates — such as research or computer software. Federal law allows money managers to pay higher than prevailing commissions to brokers so long as they receive investment research in return.)

The guidelines were adopted late last month in Phoenix at an investment conference of the association that grants the chartered financial analyst designations. The guidelines ask money managers to tell both old and new clients their soft-money policies, including a description of the type of research received through such arrangements.

Money managers also must promise to provide on request details on the type of research products and services the management company received in the soft-dollar deal.

accent is on use

AIMR’s final soft-dollar guidelines — first proposed last fall — relaxed the definition of research acceptable as part of these arrangements. The new wording focuses on the research’s primary use as it helps money managers in making investment decisions, bringing the definition closer to industry practice.

The draft guidelines limited the type of research acceptable under these arrangements based on their “primary content,” which was inconsistent with the way research is defined by the Securities and Exchange Commission, according to Kristi Potts, director of compliance at Capital Institutional Services in Dallas, a soft-dollar brokerage firm.

The final guidelines also clarified that money managers must tell clients, upon request, the total amount of commissions generated for that account through soft-dollar arrangements, broken down by broker, as well as all research and services obtained firmwide through such relationships. The two do not have to be cross-referenced.

“There are some organizations that have obtained a marketing advantage by saying they don’t use soft dollars at all, but that is different from disclosing how you are going to use them,” said Marshall E. Blume, a professor of finance at the University of Pennsylvania’s Wharton School in Philadelphia, who has written extensively about such arrangements. “My gut feeling is that disclosing your use of soft dollars will not create a great competitive advantage.”

Added Junius “Jay” Peake, a finance professor at the University of Northern Colorado in Greeley, “I don’t think its going to help them sell any stock.”

And William F. Quinn, president of AMR Investment Services Inc. in Dallas-Fort Worth, Texas, decried the guidelines as “not all that effective.”

The new AIMR standards merely ensure that money managers provide clients with information about their soft-dollar arrangements with brokers, but large institutional investors already can get that information upon request, he said.

For example, the approximately $6 billion American Airlines Inc. pension fund, which AMR oversees, usually bans its money managers from engaging in soft-dollar transactions. When they do use soft dollars, Mr. Quinn said, the managers must provide a quarterly statement of all such trades, and explain why they were necessary.

setting the pace

Theodore Aronson, managing partner of Philadelphia-based money manager Aronson + Partners, who moderated a panel on soft dollars at the conference, which drew more than 700 attendees, believes AIMR’s soft-dollar standards might become the norm — just as the group’s performance standards did. If that happens, money managers who do not adopt them could be at a competitive disadvantage.

Wayne Wagner, chairman of the Los Angeles-based Plexus Group, an investment consulting firm, was a member of the AIMR task force that developed the soft-dollar standards. He agrees with Mr. Aronson: “Who wants to say, ‘We don’t believe in these standards of open disclosure’?” Besides, AIMR’s standards “tend to have a lot of sway,” Mr. Wagner noted.

What’s more, even staunch opponents of soft-dollar usage, such as H. Garth Dickey, former director of the Indiana Public Employees’ Retirement Fund, conceded the standards are a good first step.

“I would like to see all the AIMR members being AIMR-compliant, including adopting these” standards. But he warned, the buck ultimately stops with pension plan sponsors.

Crain News Service