The Investment Company Institute is worried that soft dollar rules will encourage broker/dealers to do more business with hedge funds, putting mutual funds at a disadvantage. ICI has therefore asked the Securities and Exchange Commission not to leave hedge funds free to use all the soft dollars they want while subjecting mutual funds to the soft dollar limits contained in Section 28(e).
“The regulatory disparity, especially when combined with other forces exerting downward pressure on overall commissions, may create strong incentives for broker/dealers to favor hedge funds,” the ICI says. The Institute said it was satisfied with the new soft dollar interpretive release providing more specific guidance on permissible uses for soft dollars--but not with the fact that only mutual funds were subject to it.
The remedy, according to the ICI, is to adopt a rule under Section 206(4) of the Investment Advisors Act to ban a fund manager from using client commissions to pay for any products or services that fall outside the safe harbor. The SEC could impose that requirement on hedge fund advisers which have registered under the IAA.