Soft Dollars Research Articles

‘Nobody Is Proud of Soft Dollars’: the Impact of MiFID II on US Financial Markets

Abstract Scholars and policy makers have long debated whether securities firms should be allowed to bundle the cost of execution services with the cost of research. Investor advocates condemn the practice whereas industry representatives defend it. In 2018, as part of the Markets in Financial Instruments Directive II (MiFID II) legislative regime, the EU forced the unbundling of commission charges, diverging from US legal standards which still allow ‘soft dollar’ payments for research. The EU’s unbundling regime has challenged global financial services firms, which must now comply with conflicting rules across national boundaries. For more than five years, the US Securities and Exchange Commission provided temporary no-action relief to facilitate compliance with MiFID II, but that relief expired in July 2023, presenting an opportunity to reconsider the impact of MiFID II’s unbundling regime and its implications for US regulators and investors. While this article takes a critical view of soft dollar practices, the story of MiFID II presents contested issues of policy analysis as the agency costs inherent in bundled commissions could be offset by the public benefits of additional research. Unbundling also offers a noteworthy example of an innovation in capital markets regulation flowing from Europe to the United States rather than the other way around.

The Economics of Soft Dollars: A Review of the Literature and New Evidence from the Implementation of MiFID II

For nearly half a century, the bundling of research services into commissions that paid for the execution of securities trades has been the focus of both policy discussion and academic debate. The practice whereby asset management firms make use of investor funds to cover the costs of research, known as “soft dollar” payments in the United States, resembles a form of kickback or self-dealing. The payments allow asset managers to use investor funds to subsidize the cost of the asset managers’ own research efforts even though those managers charge investors a separate and explicit management fee for advisory services. So why does this form of kickback continue to exist? Over the years, defenders of the practice have argued that soft dollars mitigate principal-agent problems between the investment manager and the broker, improve fund performance, and provide a public good in terms of the increased production of research on public companies. This article evaluates these theoretical arguments through the lens of academic work done in the past as well as an emerging new body of empirical studies exploring the impact of MiFID II, a European Union Directive that severely restricted the use of soft dollar payments in European capital markets as of January 2018. The weight of empirical evidence, including recent evidence coming out of Europe, suggests that the theoretical arguments in favor of soft dollars are not robust. In particular, MiFID II’s unbundling of commissions appears to have, on balance, improved European market efficiency by eliminating redundancy and producing information that is of greater value to investors.

Financial Sustainability of an Oregon Rural Health, Primary Care, and Pharmacist-Run Comprehensive Medication Management Program Through Direct Medical Billing.

Although several states recognize pharmacists as providers and allow credentialing, this practice is not recognized nationwide. Following adoption of Oregon House Bill 2028, pharmacists are recognized as providers, allowing "health insurers to provide payment or reimbursement for their services to patients." Before this law, and in several instances currently, pharmacist-run programs were financially justified through soft dollars saved by improving patient outcomes, reducing emergency department use, and decreasing readmission rates. To determine if direct billing of third-party payers covers the direct cost of a comprehensive medication management (CMM) program in an ambulatory rural health adult population with uncontrolled diabetes or hypertension. This study of a population derived from 2 Oregon rural health primary care clinics was a retrospective chart review of adults (aged ≥18 years) with a primary diagnosis of diabetes mellitus or hypertension who completed a CMM visit with a clinical pharmacist from March 2017 to June 2018. In determining the financial sustainability of a pharmacist-run CMM program, the following primary outcomes were evaluated: (a) percentage of visits completed per insurance type; (b) median reimbursement rate (dollars per visit) per insurance type; and (c) the estimated number of visits per day to cover 100% of the total CMM cost annually. The secondary outcome was the percentage of the major third-party payers that allowed credentialing of pharmacists. All outcomes were evaluated using descriptive statistics. 664 CMM visits were included. Visits per insurance type comprised Medicare Advantage (34%), traditional Medicare (25%), Oregon State Medicaid (20.9%), commercial (17.8%), and self-pay (cash; 1.4%). Median reimbursement rate (dollars per visit) was highest from Oregon Medicaid, followed by Medicare Advantage, and lowest among commercial, self-pay (cash), and traditional Medicare. Total reimbursement received throughout the duration of this pilot project covered 14.1% of the total CMM program cost. It was estimated that approximately 17 visits per day are needed to cover 100% of the total CMM cost annually per pharmacist relying solely on direct revenue within these clinics. Currently, of the 18 contracted insurance companies, only 50% recognize and allow credentialing of pharmacists as providers. Pharmacist-run services within the 2 rural health primary care clinics were not financially justifiable via direct billing of third-party payers alone. The lack of credentialing, recognition of pharmacists as providers, and reimbursement is inadequate for program expansion and sustainability without relying on additional revenue streams or benefits from improved patient outcomes. Currently, federal insurance significantly contributes to this lack of funding. No outside funding provided support for this research; however, funding from Willamette Valley Community Health was given in the form of a grant to partially fund the comprehensive medication management pilot program. Pharmacists were paid from this grant, while Sublimity Pharmacy compensated pharmacists in the form of benefits. The authors have nothing to disclose. This work was presented in part as a poster at the ASHP Midyear Clinical Meeting; December 4, 2018; Anaheim, CA, and as a peer-reviewed podium presentation at the Northwestern States Residency Conference; May 4, 2019; Portland, OR.

Issues in Mutual Fund Soft-Dollar Trades

The purposes of this article are to explain the nature, use, and costs of mutual fund soft-dollar trading, including the legal “safe harbor,” “soft dollars,” “bundled commissions,” trade disclosure, agency conflicts, and empirical trading costs. The safe harbor protects investment managers from liability for a breach of fiduciary duty solely on the basis they paid more than lowest commission rates to receive brokerage and research services. “Soft dollars” are the incremental commissions funds pay for research produced or provided by brokers. The SEC and Congress (as to Section 28(e)) should “unbundle” soft dollar commissions by requiring separation of soft dollars from total trade commissions.Opaque soft dollar commissions and former bundled distribution commissions exacerbate agency conflicts between fund advisers and shareholders. The conflicts include excessive and more costly soft dollar commissions that bring financial benefits to both fund advisers and brokers.Fund advisers are motivated to use soft dollar commissions to increase complexity and to obfuscate research payments. Soft dollar commissions are opaque and have a positive impact on investor inflows, but at the expense of lower fund performance. Expensed research and distribution payments are significantly less detrimental to fund performance, but their greater transparency has a negative impact on investor inflows.With or without unbundling and until prohibition of soft-dollar trades, the SEC should require mutual funds to disclose two sets of information in the statement of additional information (SAI), the shareholder annual report, and for SEC online files: (1) payments to non-soft-dollar brokers for (a) brokerage commissions and (b) trade execution costs (inclusive); (2) payments to soft-dollar brokers for (a) brokerage commissions and (b) trade execution costs (inclusive); and (c) broker soft-dollar payments to fund advisers.Agency conflicted soft-dollar trades may be characterized as higher-cost trades that provide financial benefits both to mutual fund advisers and brokers, and reduce fund assets and shareholder returns.Soft-dollar trades have higher implicit (market impact trade execution costs), and higher explicit (brokerage commissions) and total trade costs than full-service broker trades. The larger difference in implicit trade costs is the major cause of the difference in total trade costs. Explicit costs of soft-dollar broker trades are only one basis point higher than costs of full-service broker trades for both buys (sells), but implicit costs are 29 (24) basis points higher. Total soft-dollar trade costs are 30 (25) basis points higher than costs of full-service broker trades for buys (sells).The average mutual fund pays 27 basis points in brokerage commissions per dollar of assets with an expense ratio of 134 basis points. A one basis point increase in brokerage commissions is associated with a decline of five to six basis points in fund returns. The negative effect of brokerage commissions on fund returns is four times as large as the effect of expense ratios.

Market devices and structural dependency: The origins and development of ‘dark pools’

Abstract‘Dark pools’ are private, electronic share-trading systems in which participants cannot see each other's buy and sell orders. This article shows that the development of these material ‘market devices’ was strongly shaped by the structural dependency of their intended clientele (fund-management firms) on the big investment banks, particularly the indirectly monetary mechanism of dependency known in the US as ‘soft dollars’. The article's underlying argument is that (a) the sociological analysis of financial markets requires bringing together the focus on materiality of, for example, actor-network theory with an emphasis on structural advantage such as that found in field theory; and (b) that both actor-network and field theory approaches could be strengthened by a stronger focus on mundane but important monetary mechanisms such as ‘soft dollars’.

Mutual Funds’ Soft Dollar Arrangements: Determinants, Impact on Shareholder Wealth, and Relation to Governance

Mutual fund advisers either expense the cost of research and other services or pay for them with soft dollars. This study is the first to use actual soft dollar and total brokerage commission figures for a large number of funds and to examine how soft dollars are linked to mutual fund governance. Employing a survivorship bias-free sample of actively managed US mutual funds, we find that higher soft dollar and total brokerage commissions are associated with higher advisory fees but not with higher risk-adjusted fund returns. These findings suggest that mutual fund shareholders, on average, do not benefit from the research and the information supplied by third parties such as brokers. We also find that larger and more highly compensated boards are associated with lower advisory fees. Larger boards are also associated with slightly lower turnover. The median tenure of board directors is negatively correlated with soft dollar commissions and turnover, but not correlated with total brokerage commissions or the cost of turning over a portfolio. Higher proportions of directors with a finance background are associated with higher advisory fees, brokerage commissions, and turnover costs. These associations might indicate greater agency costs.

New insights into mutual fund brokerage commissions

Using data collected from equity mutual fund reports filed by single-fund registrants to the Securities and Exchange Commission, I study the determinants of brokerage commissions paid by fund managers when they buy or sell securities and investigate the role these commissions play in fund performance. Consistent with related studies, my results from cross-sectional analyses reveal that higher portfolio turnover funds are associated with higher commissions and larger funds incur lower commissions, as well as the positive relation between expense ratios and commissions. This positive relation is puzzling as most commissions include “soft dollars” for payments of products and services that should be already covered by the costs reported under expense ratios. However, once I take into account unobservable fund heterogeneity, I find that higher expense ratio funds do not necessarily pay higher commissions. Further, controlling for whether a fund increased commission payments as the result of flow-induced trading, I show that the underperformance related to brokerage commissions documented in the literature is attributable (at least partly) to higher level of fund flows.

Soft Dollars and Conflicts of Interest in Equity Funds in Korea

Soft Dollars and Conflicts of Interest in Equity Funds in Korea

The Mutual Fund Total Cost Construct: Elements and Estimates

The research provides the mutual fund Total Cost Construct that would provide transparency of to shareholders if adopted by the fund industry and by the SEC for fund reporting and disclosure. Full disclosure would enhance analysis to estimate each cost item for samples, say, of large-cap funds. Until disclosure of all cost items in the Total Cost Construct becomes a reality, cost items will be estimated piecemeal as individual fund and fund sample cost items become available or empirically estimated. The Total Cost Construct's categories include (1) Fund Management Fees (bp), (2) Fund Distribution Fees (bp), (3) Fund Trading Costs (bp), and (4) Fund Total Costs (bp). The categories and their numerous components and sub-components are included and defined, as are supplemental cost items. Before exploring the Total Cost Construct, the Partial Cost Construct is considered. The Construct's three categories include: (1) Fund Management and Non-Management Fees (bp), with two components and the latter with two sub-components; (2) Fund Trading costs (bp), with two components; and (3) Fund Total Costs (bp). Supplementary soft-dollar commissions and soft dollars are also estimated. The composition of the first category based on empirical research enabled the ability to estimate Fund Total Costs. The scope of the Partial Cost Construct reflects the SEC's limited menu of disclosed mutual fund reported cost items available for empirical research. The Construct is thus much less comprehensive in scope and detail than the normative Total Cost Construct, but it does provide a narrow-based estimate of Fund Total Costs.

Mutual Fund Soft Dollar Arrangements: Determinants and the Effect on Shareholders

Mutual fund advisers determine the scope of brokerage services, broker participation, and whether to self-produce or outsource brokerage services through soft dollar arrangements. In return for the outsourced research, fund shareholders may expect to benefit from better performance and a reduction in the advisory fee. This study is the first one that (i) uses actual (not estimated) soft dollar fee amounts, and (ii) examines soft dollar arrangements in the context of mutual fund governance. We analyze soft dollar arrangements using a unique survivorship bias-free hand-collected data set of 432 U.S.-based equity funds managed by 129 different advisers. We find that higher soft dollar commissions are associated with lower risk-adjusted performance and higher advisory fees. That is, shareholders’ wealth is adversely affected by the cost of soft dollar arrangements. While we cannot rule out that at least some research paid for with soft dollars is superior, research quality is likely not homogenous, and the cost of obtaining it on average appears to outweigh the benefits. Larger boards are associated with lower advisory fees. At the same time, funds that have boards with higher proportions of members with finance occupations and more highly compensated boards (the variables usually associated with higher board quality) tend to pay higher soft dollar fees. This result may be indicative of the alignment of board members’ interest with those of the fund management.

Brokerage Commissions and Soft Dollars: The Hidden Costs of Owning Mutual Funds

Brokerage Commissions and Soft Dollars: The Hidden Costs of Owning Mutual Funds

Mutual Fund Corporate Culture and Performance

There are several reasons why mutual fund corporate culture should predict fund performance. First, at funds with excellent corporate cultures, employees are recognized for their contributions and are involved in decision making. This usually translates into employees working harder, being more productive, and more committed to the firm. All things being equal, this should enhance fund performance as funds with excellent corporate cultures will not have to engage as regularly in the expensive process of hiring and training new employees as other funds. Second, a fund with a strong corporate culture will be investor driven rather than sales driven. Consequently, it will pursue policies that always have the investor in mind, e.g., closing funds that are too large, not using trendy funds just to attract greater assets, keeping fees fair, not using soft dollars, and implementing redemption fees to stop market timing. Such policies should improve fund performance for the investor as compared to funds that do not practice these policies. Third, a fund with an excellent corporate culture will communicate well to its investors. Such a fund will put out shareholder letters that explain in-depth what they are buying, not buying, and what went right as well as what went wrong. This effective communication should help investors place the current investing environment into perspective and thus can help them think longer term and avoid making fleeting decisions. As a result such a fund will have better performance as they will have long-term investors that are less likely to engage in market timing strategies. In this paper we test if the above ideas hold as we examine if a mutual fund’s own corporate culture predicts fund performance. To do this we use Morningstar’s corporate culture grades for mutual funds and then examine the ability of these corporate culture grades to predict risk-adjusted performance of domestic equity funds over the period 2005-2010. Using methods that are robust to survivorship bias, we find there is little significant evidence that corporate culture predicts better fund performance. In the end having a fund with a strong corporate culture may insulate a mutual fund from scandal but will not result in the mutual fund outperforming the market.

Assessing multivariate predictors of financial market movements: A latent factor framework for ordinal data

Much of the trading activity in Equity markets is directed to brokerage houses. In exchange they provide so-called “soft dollars,” which basically are amounts spent in “research” for identifying profitable trading opportunities. Soft dollars represent about USD 1 out of every USD 10 paid in commissions. Obviously they are costly, and it is interesting for an institutional investor to determine whether soft dollar inputs are worth being used (and indirectly paid for) or not, from a statistical point of view. To address this question, we develop association measures between what broker–dealers predict and what markets realize. Our data are ordinal predictions by two broker–dealers and realized values on several markets, on the same ordinal scale. We develop a structural equation model with latent variables in an ordinal setting which allows us to test broker–dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. The method is then used to analyze our dataset.

The End of “Soft Dollars”?

Over the past few decades, mutual fund shareholders have paid to brokerage and investment banking firms billions of dollars in so-called soft-dollar commissions that have far exceeded the costs of executing the transactions. Over the years, the U.S. SEC’s inconsistent interpretations of pertinent sections of the Securities Exchange Act of 1934 have generally allowed the continued use of soft dollars for the payment of not only brokerage commissions but also research products and services. This article discusses the history of the practice and suggests two approaches that may hasten the end of the era of soft dollars: client commission-sharing arrangements and paying for research directly in cash. See comments on this article.

Assessing Multivariate Predictors of Financial Market Movements: A Latent Factor Frame Work for Ordinal Data

Much of the trading activity in Equity markets is directed to brokerage houses. In exchange they provide so-called which basically are amounts spent in research for identifying profitable trading opportunities. Soft dollars represent about USD 1 out of every USD 10 paid in commissions. Obviously they are costly, and it is interesting for an institutional investor to determine whether soft dollar inputs are worth being used (and indirectly paid for) or not, from a statistical point of view. To address this question, we develop association measures between what broker-dealers predict and what markets realize. Our data are ordinal predictions by two broker-dealers and realized values on several markets, on the same ordinal scale. We develop a structural equation model with latent variables in an ordinal setting which allows us to test broker-dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. The method is then used to analyze our dataset.

The investor's dilemma: how mutual funds are betraying your trust and what to do about it

Foreword. Preface. Acknowledgments. Chapter 1. Mutual Funds: A painful Birth. In the beginning. A Good Idea. Cracks in the Good Idea. Chapter 2. Searching for Rational Investors in a Perfect Storm. A Perfect Storm. A Simple Survey. The Fortune 10 Test. The Performance Test. Value Investing: A Behavioral Finance Perspective. Chapter 3. The Anatomy of the Stock Market. The Stock Market Chapter 4. Investing at Warp Speed. Sell It All Every Year? Massachusetts Investors Growth Stock Fund. Investing Blind. Chapter 5. Greed is Good: The Appeal of a Publicly Owned Fund Management Company. T. Rowe Price. Profitability. How To Make 80 Percent a Year Without Breaking the Law. Conflicts of Interest. Grow The Assets. Who's Watching the Store? The Greed Factor. Candor Becomes A Casualty. Form Over Substance: Shame on the SEC. The Failure of Candor Runs Deep. As Good As It Gets? Chapter 6. The Investor's Dilemma: Long on Life Expectancy, Short on Income and Searching for Guidance. A Crisis of Moral Imagination. How The Other Half Lives ... Everyone Agrees: We Are Frightfully Poor Investors. And Now A Word From Pogo ... What Pogo Forgot. Of Bubbles and Swans. Are You A Patient Investor? Chapter 7. The Industrialization of Mutual Funds. Margin of Safety. Economy of Scale. How the Marketing of Mutual Funds Came to Look Like Soap. Franklin Resources-A Study in Economies of Scale. Industrialization. Retailers, That's Where the Money Is. The Death of Security Analysis. Asset Allocation. Rebalance My Portfolio ...You Said What? A Witch's Brew. About Those Benchmarks ... Wrapping Up the Benchmarks. Managing By Rote Can Hurt ... Badly. Chapter 8. Through a Window ... Darkly. The First Story Behind Those Numbers. Multiclass Fund Shares. Now Here's a Stealthy Way to Influence a Broker's Advice. Soft Dollars? - Hey, That's My Hard Cash. Revenue Sharing. Corruption by Committee: The Story Gets Worse. Devious and Deceptive? What's Missing From the Disclosures? Some Particulars. Boards of Directors: Watchdogs or Lapdogs? Some Unresolved Questions. Chapter 9. How to Pick a Mutual Fund. An Overview. Back to Pogo ... And You! Buy A Mutual Fund? The Good Funds Fairly Shout Out Their Strengths. What to Look For in a Stock Fund. Price and Value. Index Funds. Two Stock Funds. Notes. Index.

Can third-party payments benefit the principal?: The case of soft dollar brokerage

In a typical soft dollar arrangement, a security broker provides an institutional portfolio manager with credits to buy research from independent vendors in consideration for the manager's promise to send the broker premium commission business when trading his portfolio securities. Because portfolio investors implicitly pay for brokerage, critics argue soft dollars reflect a breach of loyalty in which the manager unjustly enriches himself by shifting to investors the research bill he should pay out of his own pocket. We hypothesize, to the contrary, that by paying the manager's research bill up-front the broker posts a quality-assuring performance bond that efficiently subsidizes the manager's investment research. Our database of private money managers shows premium commissions are positively related to risk-adjusted performance, suggesting soft dollars benefit investors. Premium commissions are also positively related to management fees, suggesting soft dollars are not a pure wealth transfer from investors that is competed away in the managerial labor market.

SEC releases new interpretive guidance on soft dollar arrangements

PurposeTo describe and analyze in detail an Interpretive Release (the “2006 Interpretation”) approved on July 12, 2006 by the US Securities and Exchange Commission (“SEC”) regarding the soft dollar safe harbor under Section 28(e) of the Securities Exchange Act of 1934.Design/methodology/approachFollowing a brief discussion of the history of soft dollars, describes and analyzes in greater detail relevant aspects of the 2006 Interpretation, including an explanation of the three‐part test concerning the use of soft dollars to pay for products and services under the safe harbor, a discussion of “mixed use” items, further detail on soft dollar arrangements, an explanation of liabilities and obligations of managers and broker dealers, and an implementation timeline.FindingsUnder the 2006 Interpretation, a money manager may rely on the safe harbor to acquire products or services only upon satisfaction of each part of a three‐part test. First, does the product or service meet the eligibility criteria of Section 28(e)(3)? Second, does the eligible product or service provide lawful and appropriate assistance in the performance of relevant responsibilities? Finally, may the money manager properly conclude, in good faith, that the commissions paid are reasonable in relation to the value of the research and brokerage products and services provided by the broker (in relation either to the particular transaction or to the money manager's overall responsibilities with respect to discretionary accounts)? The 2006 Interpretation also is relevant to broker‐dealers who may receive soft dollars. Under Section 28(e), a money manager can pay soft dollars only to broker‐dealers who “provide” research or brokerage services and “effect” transactions. Under the 2006 Interpretation, the circumstances under which broker‐dealers will be seen as “providing” services and “effecting” transactions will be interpreted more broadly than under past interpretations, allowing brokers and money managers greater flexibility to structure soft dollar and commission‐sharing arrangements in a manner that will better serve the interests of investors.Originality/valueProvides a detailed analysis of the 2006 Interpretation concerning soft dollars.

Mutual funds under fire: a chrononogy of developments since January 1, 2003

PurposeThe purpose of this paper is to provide a comprehensive background on the recent legislative, regulatory, and prosecutorial scrutiny of mutual funds and underlying issues such as the level and transparency of fees and costs, distribution and sales practices, and fund governance.Design/methodology/approachProvides a detailed chronology of events since January 2003 concerning mutual fund scandals such as trading abuses and questionable sales practices and related issues such as revenue sharing, directed brokerage, soft dollars, market timing, late trading, and selective disclosure. The chronology in this issue of JOIC will be followed an article in the next issue that describes reform initiatives that have taken place in response to the scandals.FindingsDespite criticism and scrutiny of equity mutual funds following poor performance in 2001 and 2002, meaningful efforts to achieve reform began to lose momentum in mid‐2003. Then concern with mutual fund abuses was reignited in September 2003 when New York Attorney General Eliot Spitzer announced a settlement with Canary Capital that involved market timing, late trading, and selective disclosure. Since then there have been numerous disclosures of fund trading abuses and questionable trading practices, and the resulting uproar has triggered significant efforts to reform the manner in which funds and their service providers conduct business.Originality/valueThis comprehensive chronology provides an essential reference by bringing together all the events and underlying issues related to mutual fund scandals, abuses, regulation, compliance, and reform efforts since January 1, 2003.

Low cost compliance technology being used to implement new SEC and FSA regulations governing “soft dollars”

PurposeTo explain that, unlike with Sarbanes‐Oxley, relatively low‐cost technologies and procedures are becoming widely accepted for helping institutional money managers and hedge funds to comply with reforms to increase the transparency, documentation, and justification of “soft dollars”. Soft dollars are commissions that money managers pay to brokerage firms above and beyond actual trading execution costs.Design/methodology/approachThe article examines two such technologies by surveying different offerings and reviewing in detail market‐leading systems. The first technology examined is trade‐idea communication and management systems, which capture and analyze quantitative information about equity‐trade ideas. The second technology is broker review systems, which capture and analyze qualitative information on proprietary brokerage and research services. Both trade ideas and proprietary brokerage services are paid for through soft dollars and generate approximately 50 percent of an estimated $18 billion in annual brokerage commissions for Wall Street.FindingsThere are three primary reasons why these technologies and procedures cost much less than those used to enforce Sarbanes‐Oxley. Technologically, they have features that keep costs low, encourage use, facilitate customization and leverage existing data. Operationally, they automate practices already in place, capturing lost value and generating important management information. From a regulatory point of view, they do not require the documentation and testing of controls in advance, as Sarbanes‐Oxley does – procedures that can only be defensively accomplished by outside auditors and attorneys. Instead, money managers are being asked to capture and evaluate management information, which, in turn, they are using to increase productivity.Originality/valueRather than avoiding soft dollars for fear of the regulatory overhead, or developing complicated and expensive legalistic procedures, institutional money managers and hedge funds are using relatively low cost technology to enforce “soft dollar” compliance. At the same time, they are generating valuable management information that is helping them to become more productive.