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Soft Money, Article Review Example

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Article Review

“In soft-dollar arrangements, money managers and investment advisers give their orders to a specific broker and pay higher fees in exchange for ”rebates” in the form of investment research.” (‘Soft Dollar’ Case Charges Filed 1997). Financial advisers have the option to arrange soft dollar payment for research, products, or other services as long as they disclose this arrangement to their client.  Under law the, advisers must provide sufficient information to allow potential clients or clients to understand what their practices and policies include.

An adviser is obligated under both the state law and Investment Advisers Act of 1940 (“Advisers Act”) to act in the best interests of its client. (SEC 1963) The credibility and licenses of the advisor, as well as the firm they work for, are at stake when soft money is not handled as required by law.  When advisors take payments from brokers, they are not necessarily acting in the best interest of their clients, and it can interpret as conflict of interest or payment for recommended services.  There are legal consequences that can come about as a result of violation of the soft money laws. This can include loss of licenses as well as jail time and fines.

Financial advisors work for many different venues such as banks, mutual and pension funds, making investment decisions or recommendations, insurance companies, business media, securities firms, and other businesses. Their professional duties are to their clients as well as their firm.  Whereas it would be assumed that their obligations would be to both their clients and their employer, most often their priority is to their company. There is also a personal professional obligation for financial advisors with their licenses.  The most common license is the Financial Industry Regulatory Authority (FINRA).  Accepting soft money payments is completely legal, when advisors and firms follow the guidelines established by the SEC and the government.  Individual rights can be violated when soft money is not adequately or honestly disclosed. The rights can also be abused when an advisor is receiving executions at inferior prices – creating a conflict of interest between their research, and the client’s interest for paying the lowest commission rate.  If soft money payments were allowed without any stipulations or guidelines, there would be a vast amount of corruption.  The client’s needs would rarely be priority and the agent would most likely tack on excess expenses for no valid reason.   It could have a devastating effect on the securities industry. “Congress should tighten the rules on ”soft dollar” commissions by limiting the types of services that mutual funds can obtain with such payments, the Securities and Exchange Commission said in a report released yesterday.” (Norris 2003)  There are many public policies in place such as Section 28 (e), Employee Retirement Income Security Act of 1974 (ERISA), and the Investment Company Act of 1940 to name a few.  Legal solutions and punishments should be directly involved with the violation of the standards set for soft money use and disclosure. Ultimately failure to comply with the standards can be interpreted as nothing more than an agent trying to defraud a client.

References

Norris, Floyd.  (2003)  The Markets: Market Place; The S.E.C. takes aim at hidden commissions that are said to mask the true cost of mutual funds.  New York Times.

‘Soft Dollar’ Case Charges Filed  (1997).  New York Times.

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963)

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