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Hi Jesse,

At first glance, I am troubled because the so-called "soft dollar" issue is indeed a media-ready slogan if I ever heard one. It's easy to say and lends itself to repetition without actual understanding. Honestly, I've managed to get through a few years of investing without ever hearing it before, so I wonder how many folks in everyday life really grasp it.

Since it is a real term, I thought it worth finding somebody to explain it to me. The search turns into a mini history lesson. First, at we discover that the SEC made an effort in 1995 to require investment advisers to expand the disclosure they provide regarding their "soft dollar" practices. Proposed Rule 204-4 and proposed Form ADV-B would have required registered investment advisers to report to their clients annually on their brokerage practices, including soft dollar arrangements.

For reasons not clear in that article, the SEC dropped that clampdown effort in 1996.

Six years later, in what seems to be a reversal of attitude, the SEC was described in a different article as trying to *expand* the range of activities protected under "safe harbor" provisions in securities law, which specifically includes the use of soft dollars. Interestingly the article (at seemed to complain that the SEC was not lenient enough!

And now, in 2004, the regulatory pendulum has swung back once again. The government is once again concerned about this topic and about the safety of investors. So I can't help wondering what are the chances that, five years from now, some other schmuck on a discussion board somewhere will be doing research like I am now, and discovering that nothing was ever really cleaned up in 2004 either. <LOL> Well, I guess the New Year has not made me less cynical!

Given the variance of opinions as mentioned above, and the fact that the SEC has not even been consistent in its attitude about this topic, I wonder how much to worry over it. After all, there have been a lot of really blatant abuses of the fiduciary responsibilities of fund management, particularly those in which major investors got preferential treatment over everybody else. It's basically the same as insider trading -- white collar thievery -- and it gets my dander up.

By contrast, although I'd like to see it cleared up, the "soft dollar" thing looks like a more ambiguous target. At worst, it seems that some fund companies may have made more money off you and me than they told us. Also, some brokers made more money off us than we knew about.

Okay, but did we still manage to make money from owning the funds being managed by those people? Some of us did, especially in 2003, for instance. And did the biggest mutual fund losses in recent years come because of "soft dollars?" Heck, no.

The biggest losses came from crappy stock picking, especially during difficult economic times. "Soft dollars" just added some insult to the far more painful injuries caused by boneheaded, overpaid fund managers. Who is to blame for the fact that all the bad-performing funds kept making money and getting new customers? Well, sooner or later don't we have to blame the customers for allowing it to happen? Shouldn't people in unions or other organizations be pestering their pension fund managers for investing in underperforming funds?

The situation reminds me of people who complain about gasoline prices but do not accept any blame for buying inefficient automobiles. By going along with the crowd, they create a cycle of supply and demand that becomes self-perpetuating. And since our leaders are so obsessed with radical laissez-faire capitalism, they refuse to regulate such energy abuse, even though it is a key to our economic malaise.

So, since we seem indifferent to the waste of money on imported oil, as just one example, why should we be so bugged about the waste of money on Wall Street? We seem to be a wasteful, inefficient society in many respects. I bet that at least a few of the small investors obsessing over mutual fund performance are also carrying credit card debt at exorbitant interest rates -- and losing more money that way than they are because of soft dollars that add half a percentage point of expense to their IRA or something like that.

Now, to be clear: yes, I am happy to see regulators uncovering the really egregious violations of trust. Yes, I think the structure of mutual fund companies should be easier to understand and that the financial statements should be held to a higher standard. I just think that the issues are much larger than "soft dollars." I also think investor education should be addressed as a public policy issue.

After all: I suspect that many investors barely understand things like alpha, beta and R-squared -- measurements that can actually tell them something concrete about the performance of the mutual funds they own. To throw this "soft dollar" term at them, hard on the heels of other quasi-news stories about "market timing" and so on, just confuses them. has the official text of the Senate's "Mutual Fund Transparency Act of 2003" and the law does not contain the phrase "soft dollars." However, you'll find that term in other places where the text of the law is paraphrased.

It is also mentioned in reference to other legislation, for example, at

The page comes from the Credit Union National Association, but the words come from Arthur Levit, the Former Chairman of the SEC, who testified on the “Mutual Fund Integrity and Fee Transparency Act” then before the House of Representatives. He lamented that

...investors don't even get what they pay for when they buy into a mutual fund. The culture, he testified, that contributed to this result is a culture of hype and salesmanship instead of safety and preservation. He urged the industry to recognize the grave threat these problems represent to its health and embark on substantive reform along with the SEC... with regard to soft dollars, he recommended that investors should know what commissions they are paying and what the money is going towards.

So... back to that WSJ article you cited: it cited things like a fund manager who used soft dollars to buy a computer that was not used for business, but instead was used by his family for games. Wait -- is that what we're supposed to be all bugged about?

How much could this computer possibly have cost? Totally decked out, maybe two grand? A typical executive expense account is probably padded with two grand worth of bogus business dining and travel every year. Couldn't the writers come up with better examples?

Let's think about this. That expense account is also "soft dollars" that go into their employer's tax returns, and show up as a deduction. Which means, that company pays less than its share to help run the government -- leaving you and me and other, more honest people, to pay more.

Basically, it's the same problem. The general population pays more, to pad the pockets of a few who bend the rules.

We need to see "soft dollars" cleaned up *everywhere* -- not just Wall Street. But I guess it's one place to start. Let's see just how much cleaning is really done, when it's all over.

Thanks very much for the article reference and the reply!
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