Mutual Funds: Greater Transparency Needed in Disclosures to Investors Page: 49 of 73
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Although the Complete
Extent of Soft Dollar Use Is
Unknown, Soft Dollars
Could Represent a
Significant Portion of
Trading CommissionsBecause soft dollar research is often bundled, only aggregate value
estimates of soft dollar arrangements are available. According to one
industry research organization, the total amount paid in brokerage
commissions for U.S. stocks totaled $8.6 billion in 2001, up from $7.7 billion
in 2000.29 Of this amount, industry participants estimate that 15 percent of
total annual brokerage commissions, or roughly $1 billion, is used to obtain
third-party research. However, this figure does not include the value of
proprietary research, which cannot be unbundled as easily as third-party
research. Moreover, in light of recent declines in fund assets, concern has
been raised that advisers are under increased pressure to use soft dollars to
pay for research rather than incur additional fund expenses.
Soft dollar products and services appear to represent a substantial portion
of the cost of brokerage commissions on individual trades. Industry
participants estimate that on average broker-dealers charge commissions
of between $.05 and $.06 per share traded. In contrast, one industry expert
has noted that it costs less than $.01 per share to execute a trade through
an electronic communications network (ECN). ECNs are registered
broker-dealers that operate as electronic exchanges. Because ECNs do not
offer as many of the services offered by full service broker-dealers and
execute trades electronically, the cost of executing trades through these
brokers is lower. However, the estimated costs of trading on an ECN may
not be representative of trading in all securities because most activity on
ECNs involves widely traded, liquid stocks. Other estimates of the portion
of individual brokerage commissions represented by soft dollars and
execution services varied. One academic study, for example, attributes 67
percent of the cost of brokerage commissions on individual trades to soft
dollars that pay for proprietary or third-party research.30 However,
recognizing that a portion of brokerage commissions goes towards broker-
dealer profits, a consulting firm that specializes in mutual funds estimates
more conservatively that soft dollars constitute 33 percent of brokerage
commission costs.
Advisers who offer mutual funds use soft dollar arrangements to varying
degrees. According to one SEC official, many fund companies do their own
29Greenwich Associates, Commission and Soft-Dollar Practices in U.S. Equities (May 3,
2002).
30M. Livingston and E.S. O'Neal, "Mutual Fund Brokerage Commissions," The Journal of
Financial Research (Summer 1996).GAO-03-763 Greater Transparency Needed in Disclosures to Investors
Page 45
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United States. General Accounting Office. Mutual Funds: Greater Transparency Needed in Disclosures to Investors, report, June 9, 2003; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc292016/m1/49/: accessed March 29, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.