SEC TO REQUIRE BOARDS TO ENHANCE REVIEW OF FUND BROKERAGE PRACTICES
The SEC has proposed guidance to mutual fund directors for reviewing fund adviser brokerage activities. The proposal would require directors to obtain significant amounts of data from advisers including a list of broker-dealers, allocation practices, commission rates, venues (including electronic trading networks and ATSs), identification of responsible personnel, valuation of soft dollar benefits, and oversight of sub-adviser activities. The proposal also would require directors to obtain a significant amount of information to ensure that any soft dollar practices do not raise conflict of interest concerns. Additionally, more information would be required as part of the 15(c) review and the 38a-1 process. Separately, the proposal also requests comment on whether the SEC should require more brokerage disclosure in the ADV. Comments are due by October 1.
OUR TAKE: The proposal would make trading practices the most reviewed activity other than advisory fees. Also, the effect of requiring so much information about soft dollar practices would likely result in the de facto elimination of soft dollars in the registered fund context. Also, by referencing Section 15, the SEC suggests that a shareholder would have a private right of action under Section 36.