A new survey by TowerGroup chimes in on soft dollars where the ICI and other advocacy groups have left off, for now. In the survey, the group essentially stressed the importance of soft dollars to the securities industry and how regulation on the issue could hurt investors as well as the industry.

The firm agreed that greater scrutiny and transparency of soft dollars use would be beneficial, but said it believes that the rapid elimination of soft dollars could paralyze the industry and, in turn, investors. To prove its case, the firm states that ‘the sheer size of the US capital markets, combined with the industry's enormous reliance on soft dollars, means a rapid deceleration in soft dollars use would force buy-side firms to find hard dollars to pay for required research and services, while eliminating an entire "subindustry" of soft dollar brokers.”

The survey continued that should soft dollars to pay for research disappear, investment managers will become stingier with the IT budgets that support the research and investment decision-making process, since much of these technology budgets are funded through soft dollars.

Other points:

The rapid elimination of soft dollars could also lead to order flow shifting more quickly from brokers to electronic venues (where buy-side firms are more likely to have lower trading/transaction costs), as well as less reliance among investment managers on external research.

The firm believes that even without regulatory intervention, soft dollar spending will decline by more than 11% over the next five years.  

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