According to the firm, institutions are starting to return to paying third-party brokers for research and other services based on a growing belief that the SEC is not planning a dramatic overhaul of rules pertaining to Section 28(e). The SEC made the proposal to overhaul Section 28(e) in 2005, but has not yet implemented a rule change.
According to the firm, institutions had taken a more conservative stance with soft dollar arrangements as they waited for regulators to make a ruling. Industry-wide, soft dollar totals dropped 25% to $725 million in the 12-month period ending in February 2007 from $970 million the prior year, according to Greenwich Associates.
As recently as 2004, more than 80% of institutions used soft dollars; by 2007 that proportion had fallen to 62%. In keeping with the general decline in usage, commissions directed for third-party products and services have dwindled as a proportion of overall U.S. equity commission payments, which totaled some $10.3 billion in the year ending February 2007, according to the announcement. Payments for third-party research products and services represented 9% of total commission payments in 2005 and 2006, but only 7% this year, according to Greenwich Associates.
However, use of such arrangements is expected to regain steam. When Greenwich Associates asked institutions to project their intended third-party products/services budgets for the coming year:
- Institutions predict a bounce back to 10% of total commissions;
- Investment managers predict that third-party allocations will jump to 13% in 2008;
- Banks expect to increase allocations slightly from the current 20%;
- 30% of institutions have set up client commission-sharing arrangements with brokers; and
- 60% say they will have one in place within the next 12 months.