Wall Street Wars: SEC Chairman’s “Payback” to Investment Advisors?

Last year, money managers directed a billion in dollars of their clients’ funds in hidden commissions to Wall Street investment firms, says SEC Chairman Christopher Cox. These “soft”dollars” are purportedly for research and other services. Instead, the funds are made available to the money managers who often use these for “lavish trips, theater tickets, and fancy meals,” Cox added.

In these “soft dollar” transactions, clients of investment advisers pay an extra five cents or so per share which is credited to cover costs of research and other services of the firm handling the transaction. A nickel per share may seem small, but on tens of billions of total shares traded becomes a huge amount. Those paying these costs include investors into mutual funds, pension funds, and 401(k) plans.

Laws impose a “fiduciary duty” on money managers to protect their clients’ interests, even over their own. Yet, a “safe harbor” was enacted in 1975 which allows the managers and brokerage firms to “bundle” research and other services with executions and not be liable for violating duties to their clients, including the duty to shop for the best execution price.

The inherent conflicts “offer perverse incentives to investment advisers to use them in ways that aren’t beneficial to investors,” Cox continued, describing how money managers have an incentive to trade simply to generate additional soft dollars, rather than in the client’s interest. This creates a “witch’s brew” of hidden fees, conflicts of interest which harm investors, he added.

Accordingly, Cox has personally made a request that Congress reconsider the safe harbor for money mangers provided in the legislation. This appears to be a reverse of position for Cox who has sided against investors on many issues since his appointment. He states that his position is personal and he is not speaking for the SEC on this issue.

Some believe this action by Cox may be a payback to investment advisors, who recently won a court case filed against the SEC requiring it to enforce the very same fiduciary duty requirements on Wall Street brokerage firms that Cox says investment advisors are avoiding through the safe harbor.

A spokesman for the Investment Advisers Association, which won the suit against the SEC, said it was “still evaluating” Chairman Cox’s opposition to the soft dollar safe harbor. The IAA’s roughly 500 member firms collectively manage more than $8 trillion in assets for individual and institutional clients.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.