US - US institutional investors reduced soft-dollar commissions by 10% from 2004 to 2005, but uncertainty over a final ruling by the Securities and Exchange Commission (SEC) has delayed deeper cuts, says Greenwich Associates.
New research shows soft-dollar commissions paid by institutional investors for third-party research and services fell to an estimated US$1.13bn in the first quarter, compared to US$1.25bn a year ago.
Last year, US institutions predicted the combined amount spent on soft-dollar transactions and commission recapture arrangements would account for just 11% of their total US equity commissions by 2005. But Greenwich said instead, soft-dollars alone made up 10% of commissions, and this rose further to 17% of the total commissions paid to brokers during the 12 month period with the addition of commission recapture.
“US institutions are clearly adopting a more conservative approach when it comes to paying for brokerage research and services with soft dollars,” said Greenwich consultant Jay Bennett. “However since the SEC’s review has taken longer than many investors had anticipated, the majority of US institutions in the last 12 months have decided to await the regulator’s final word before making any further changes to their own business practices.”
The SEC has indicated a soft-dollar ban is not in the pipeline, but the number of institutions using soft dollars continues to decrease. Less than three quarters of US institutions reported using soft dollars over the past 12 months, down from 82% last year and 86% in 2003, Greenwich said.
“While certain institutions have stopped soft dollars completely, many of the companies that have taken strong stands with regard to their own soft-dollar polciies have explicitly excluded soft-dollar payments for market data services, including price quotes, data terminals and others - but have not cut out soft dollars for third party research providers,” said consultant John Colon.
Despite the ambiguity concerning the ultimate scope of the SEC definition of research and services qualifying for soft dollar payment, Colon said the emerging standard of eligibility for soft-dollar payment appeared to be that the service must provide some “value-added analytical or intellectual content”.
“For now, institutions and brokers will have to evaluate for themselves whether a given service is simply a raw data stream - which apparently would not qualify as ‘research’ under this definition - or a source of some analytical content. The fact that 36% of the market is paying for electronic news and information services with hard dollars, suggests that some forms of news and information services are in doubt in terms of their appropriateness for soft-dollar payments.”
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