Soft dollars are part of the problem.
Congress should ban soft dollars. The term generally refers to brokerage commissions that pay for both execution and research services, and they are widespread among investment advisors. Soft-dollar arrangements raise multiple policy concerns. The payment of soft dollars by mutual funds creates a significant conflict of interest for fund advisors. Soft dollars pay for research that fund advisors would otherwise have to pay for themselves. Advisors therefore have an incentive to cause their fund to engage in trades solely to increase soft- dollar benefits. The SEC has frequently acknowledged, but declined to address, the problem of soft dollars. When the SEC staff last evaluated soft-dollar arrangements in 1998, it concluded that additional guidance was needed in a number of areas. For example, the staff found that many advisors were treating basic computer hardware—and even the electrical power needed to run it—as research services. The staff recommended that the SEC issue interpretive guidance on these and other questionable uses of soft dollars, but it has failed to do so.

Some fund industry members—MFS Investment, Putnam Funds, Vanguard, American Century and Fidelity among them—have shunned or restricted the use of soft dollars for research. The difficulty, however, is that without a statutory ban on soft dollars, they may suffer a competitive disadvantage. It is unrealistic to expect these fund managers to maintain the high road at the expense of reduced advisory fees, while other fund managers continue to pay their own research expenses through soft dollars rather than out of their own pockets.