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SEC Proposes Guidance for Fund Boards in Oversight of Investment Adviser Trading of Portfolio Securities, Use of Soft Dollars


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Washington, D.C., July 30, 2008 — The Securities and Exchange Commission today voted unanimously to provide guidance to the boards of directors at investment companies about their investor protection responsibilities in overseeing investment advisers who trade fund portfolio securities and use so-called “soft dollars.”

Mutual funds and other investment companies typically are operated by investment advisers and other organizations that are separate from the funds themselves. This external management can present conflicts of interest between the fund and its investment adviser, which can lead to potential opportunities for abuse. These conflicts of interest include the use by advisers of soft dollars – which represent the assets of investors — to purchase research and other brokerage services as part of their obligation to seek best execution when it trades a fund’s securities.

Under the Investment Company Act and state law, fund directors have important fiduciary responsibilities to oversee the safety of fund assets and the protection of investors. The SEC’s proposed guidance would help fund boards of directors to analyze whether to limit the adviser’s use of soft dollar arrangements.

“As the protectors of the interests of fund investors, fund boards play a pivotal role in monitoring the conflicts of interest that may arise when an investment adviser trades a fund’s portfolio securities,” said Andrew J. Donohue, Director of the SEC's Division of Investment Management.  “The importance of the board’s responsibilities in this area cannot be overstated.  The Commission’s proposed guidance would provide directors a flexible framework to work within to ensure that conflicts are being managed and that fund assets are being used in the best interest of the fund and its shareholders.”

The SEC’s proposed guidance does not impose any new requirements on fund directors or investment advisers. Rather, it proposes a flexible framework for directors to use in their oversight of an adviser’s trading activities. Specifically, the guidance suggests information for a fund board to request from an investment adviser in order to determine whether the adviser is managing any conflicts and using fund assets in the best interests of the fund.

Over the years, the Commission has acted to address conflicts in connection with an adviser’s trading activities on behalf of funds. Most recently, in 2006, the Commission issued interpretive guidance to clarify for advisers and other money managers what they can and cannot purchase with soft dollars under the safe harbor provided to them in Section 28(e) of the Securities Exchange Act.

Public comment on the SEC’s proposed guidance should be received by the Commission no later than 60 days after their respective publication in the Federal Register.

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The full text of the SEC’s proposed guidance will be posted to the SEC Web site as soon as possible.



Modified: 07/30/2008