Buddy Donohugh

10.30.2006 SEC Investment Management Director Buddy Donohugh spoke about soft dollars and other topics at the SIA Institutional Brokerage Conference in New York.He described the SEC's next soft dollar initiative, which will involve providing additional disclosure and related guidance to fund boards regarding soft dollars and brokerage practices.

Concerning brokerage execution and directed brokerage, Donohugh said that investment advisers may not think that the broker-dealer to which its clients directs the adviser to send a trade is actually the broker-dealer that is best suited to execute it.However, if the adviser's client directs that the adviser to send trades to a particular broker-dealer, it is the client's right and then it becomes the adviser's responsibility to do so.In many cases, he cautioned, the request is not a direction from the client but may be framed as a request that "subject to best execution" the adviser place a trade with a particular broker-dealer.

Donohugh further noted that there is increasing client pressure on investment advisers to be in a position to demonstrate that they are properly meeting their best execution obligation.Their institutional clients, fund boards and others are focusing on execution quality, and where possible, seeking quantifiable measures, from a practical if not a legal perspective.He added that since basic brokerage is now becoming more of a commodity, at least for many large-cap equity trades, any time that an adviser is paying more than just a bare-minimum execution-only rate for a client trade, the adviser may open itself up to questioning from its clients regarding whether the additional cost was appropriate.