Soft Dollar Brokerage - Issues of Disclosure and Transparency in Bundled Institutional Soft Dollar Brokerage Arrangements

Yesterday someone asked me a question about the American Century Funds. I thought a bit, then connected American Century to American Century’s Sr. Vice President, Harold Bradley, who you may remember stated in his Congressional Testimony in 2003(1) that soft dollar brokerage was an approximately 1.2 billion dollar per year drain on investors’ assets.(2)

In 2003, after reading Mr. Bradley’s testimony, and realizing that he derived his estimate from a Greenwich Consulting Survey, I reviewed the Greenwich Survey, found the flaw in Greenwich’s questionnaire and I algebraically computed a more accurate annual drain on investors assets from (all) soft dollar brokerage arrangements. I recall Integrity Research Associates published an article I wrote about the survey question, and the computational error.(3)

At that time, I sent letters describing the survey error and the computational error to the then Chairman of the SEC, Christopher Cox, to staff members of the SEC’s Office of Compliance, Inspections and Examinations (OCIE), to Greenwich Associates, to Senator Christopher Dodd, and to Harold Bradley at American Century Funds. I never received replies from any of these recipients.

When I was asked about American Century Funds yesterday, I connected the funds’ name American Century to American Century’s Senior Vice President, Harold Bradley. And, I was interested in doing a key words search on - Harold Bradley soft dollars – just to find out if he got my message.

I was pleased to see that Mr. Bradley is now quoted as estimating soft dollar brokerage costs at “about 12 billion dollars a year . . .” however, he doesn’t explain where the other 10+ billion per year in his estimate comes from.(4) I suspect the new 10+ billion of soft dollar brokerage Mr. Bradley now includes in his estimate is the non-transparent soft dollars which institutional investment advisors generate in bundled undisclosed soft dollar arrangements with full-service brokerage firms' institutional trading desks.

It would be interesting to know if 10+ billion still is actually a good current estimate of total institutional soft dollar brokerage. It seems to me that competition, new transaction efficiencies, and trading cost compression would force a smaller portion of total institutional brokerage commissions to be used in 'paid-up' soft dollar brokerage arrangements. (It seems in the current environment of very high quality transaction cost analysis, it would raise questions if investment advisors paid significantly higher brokerage commissions than what is required to compensate the executing broker for the broker’s fully-negotiated costs of transaction execution.

[In mid-2007, after SEC Chairman Christopher Cox sent letters, to Senator Christopher Dodd and Congressman Barney Frank, requesting that “Congress consider repealing or substantially revising Section 28(e) of the Securities Exchange Act of 1934”(5) In his letters Chairman Cox mentioned the potential investment effects of an excess of 1 billion dollars of third party brokerage soft dollars.

At that time, I again sent a letter to SEC Chairman, Christopher Cox, to Senator Christopher Dodd, and to SEC Staff at the OCIE. In these letters I attempted to explain that the 1 billion dollars of  fully-disclosed institutional third-party soft dollar brokerage seem to invite far fewer abuses, and fewer conflicts-of-interest, than my estimated 6.5 billion dollars of  soft dollars institutional investment advisors generate in bundled undisclosed soft dollar arrangements with the institutional trading desks at full-service brokerage firms.] (6)

(1) From the supporting documents included in Mr. Bradley’s Congressional Testimony, it seemed obvious that Mr. Bradley’s estimate was based on a flawed survey produced by Greenwich Consulting.

(2) Harold Bradley’s Congressional Testimony on soft dollar brokerage March 12, 2003:

(3) Integrity Research article on the Greenwich Survey’s soft dollar brokerage question:

(4) Key-words-search on: Harold Bradley Soft Dollar Brokerage

(5) See, SEC Chairman Christopher Cox’ May 17, 2007 letter to Senator Christopher Dodd in which Chairman Cox requests that Congress “repeal or substantially revise Section 28(e) of the Securities Exchange Act of 1934”, at:

(6) June 1, 2007 letter to SEC Chairman, Christopher Cox and U.S. Senator, Christopher Dodd which discusses the true magnitude, and potential for abuse, of non-transparent undisclosed bundled soft dollar brokerage arrangements, at:

Other Relevant Resources:
(1) A brief history of soft dollar brokerage titled, “Thirty Three Years Later” Published September 2, 2008, at:

(2) Manager – Investor Conflicts In Mutual Funds By Paul G. Mahoney pub. Journal of Economic Perspectives Vol. 18 #2 Spring 2004 page 172 (which is page 12 of the linked .pdf) at: 

(3) Advisors Misreport Use of Soft Dollars By Sara Hansard published Investment News July 24, 2006, at: and

(4)  An example: SEC Press Release: SEC Charges Fidelity, Executives Employees For Accepting Lavish Gifts Paid For By Brokers pub. SEC Website, March 5, 2008, at: and Fidelity Investments Settles SEC Gift Lawsuit by Riley McDermid & Jonathan Burton - published MarketWatch, March 5, 2008 at:

(5) What motivated many of the abuses outlined in the SEC’s Spotlight On: The Global Analyst Research Settlement, at

Bulk Sales of Foreclosed Single Family Homes

November 5, 2012  

Congressman Brad Sherman

5000 Van Nuys Blvd. - Suite 420

Sherman Oaks, CA 91403

Dear Congressman Sherman:

I live in the 27th Congressional District. I know you sit on the House Financial Services Committee and its Subcommittee on Capital Markets and Government Sponsored Enterprises, and I know that you also sit on the Subcommittee on Insurance, Housing and Community Opportunity.

Therefore, it seems appropriate that I bring a concern of mine to your attention.

My concern: While reading an article published in the Wall Street Journal on October 2, 2012 titled, New York Firm to Buy Fannie Foreclosures By Alan Zibel, I noticed the author mentioned the terms were the same for both of Fannie Mae’s first two ‘bulk sales’ (of foreclosed single family homes).  An outline of the terms of the deals was provided in the article (the last four paragraphs of the article).

It seems the terms of these first two bulk sales may lead to an uncertain, and very long payback period to for the GSE’s - and an even riskier and even longer payback period for any investor(s) that might be the source of funds for the managers of these deals. As long as the deal terms are fully-disclosed to the fund's (voluntary) investors their investments are their business.  

However, because of the history of Federal Housing Policy, and because of the history of the GSE’s, I believe deals such as these should be designed in a way which can actually be expected to produce rapid and less risky payment of the purchase price, than it appears the terms of the first two deals will produce.

I hope the committees you sit on will very closely review and monitor these two existing deals, and that you will have independent evaluators advise on, and audit, the structure and payment of future bulk sales of foreclosed single family homes. 

The bulk sale of foreclosed single family homes is a serious concern for homeowners, neighborhoods, and for local legislators. I believe the future financial success of these bulk sales is a critical element of the bulk sales strategy.

In the context of the GSA’s, it appears the terms of these first two deals were designed to move foreclosed homes off the GSE’s balance sheet, and to claim the 'sales agreement' as an asset.

Thank you very much for this opportunity to express my concern.


Bill George

Cc. Congressman Gary Miller

2349 Rayburn House Office Building

Washington, DC  20515


Background Information:  

(1) Private Equity’s Foreclosure Binge (& Purge) By Michael L Boyer pub. at Seeking Alpha, October 23, 2012 - at: 

(2) The Institutional Home Buying Bubble By Bill George - Posterous - at:


He Who Pays The Piper Calls the Tune

A reminder that, in real life: “He who pays the piper calls the tune”.

The mandatory implementation of fully-negotiated brokerage commissions [May Day 1975] and shortly thereafter, The U.S. Congressional approval of Section 28(e)* created an environment in which institutional ‘order flow’ became a vastly more important component in the profitability of full-service brokerage firms. [‘order flow’ = code words for undisclosed institutional soft dollar commissions]

Given the implications of fully-negotiated (retail client) commissions and 37 years of serial interpretations and uneven enforcement of Section 28(e), should anyone expect the brokerage industry to look any different than it does today?

* Section 28(e) of the Securities Exchange Act of 1934 [Also, go to linked letter requesting substantial revision or repeal of section 28(e). The letter is from past SEC Chairman Christopher Cox to former Chairman of the Senate Banking Committee, Senator Christopher Dodd, a similar letter was sent to then Chairman of the House Financial Services Committee, Barney Frank > 

Links to two related New York Times newspaper articles of interest follow:


Not All Investors Are Equal

Published: July 17, 2012



Surveys Give Big Investors an Early View From Analysts

Published: July 15, 2012


· Fair Disclosure, Regulation FD - SEC - 5k - similar pages

Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...