SEC Issues Guidance on Computer, Phone Fees

Computer equipment and telephone lines don’t fall within a reasonable definition of brokerage and research services that investment managers may charge to their clients, the Securities and Exchange Commission said Thursday in proposed guidance on the use of so-called soft dollars.

Some managers are having their clients pay for “services and products that are only remotely connected to the investment decision-making process,” the SEC wrote in its interpretative release, the latest in a series over the last 30 years on the proper use of client commissions. The agency said the guidance was “a first step” toward addressing what many consider widespread abuse of soft dollars.

A 1998 study by the agency’s Office of Compliance Inspections and Examinations found that some advisors used client money improperly to pay for certified financial analyst exam review courses, membership dues, office rent, utilities, carpeting, entertainment, meals, copiers, courier service and salaries.

The study also found widespread use of client funds to pay for computer hardware and software, as well as telephone lines and other “mechanisms related to the delivery of research or brokerage services,” the SEC said.

The SEC voted 5 to 0 on Sept. 21, at the first public meeting chaired by Christopher Cox, to issue the latest guidance on the use of soft dollars, which is the portion of commissions that clients pay their investment advisors to help fund the research they do.

Commissioners said they planned at a later date to consider tightening rules on how money managers record and disclose to their clients the soft-dollar expenditures.

The commission is requesting public comment on the proposed guidance.

Comments will be due 30 days after its publication in the Federal Register.