A practice that has become increasingly commonplace, if at times controversial, over the past four decades will now face stricter restrictions, the SEC says.
In a meeting Wednesday, the Securities and Exchange Commission voted 5-0 to increase restrictions placed on soft-dollar deals, informal favors given to money managers by brokers.
Managers receive soft-dollar payments in exchange for paying the brokers above-market commissions for executing orders. The practice has become fairly common for managers of mutual funds, hedge funds and pension funds.
Though the commission stopped short of an outright ban, the new restrictions limit the acceptable uses of soft dollars to purchase research, including market data, analytics, advice and reports, as well as brokerage services relating to trades.
Some critics of the practice call soft-dollar little more than kickbacks, saying that more often than not, soft dollars are used to pay for products and services that benefit managers, but not fund investors.
Also at the meeting, and also receiving a unanimous vote of approval, the commission agreed to propose amending rules regarding short selling, an investment maneuver that brings in profits when a stock’s price drops, instead of rising.