“Aiming to show its seriousness about mutual-fund ethics, Massachusetts Financial Services Co. has stopped paying brokers in “soft dollars” — which essentially are inflated stock-trading commissions — for research and other services,” writes John Hechinger in today’s Wall Street Journal.

“While other fund companies already forgo soft dollars, MFS said it believes it is the first major fund group to initiate a ban of the practice since the mutual-fund trading scandal erupted six months ago. The company, which has settled civil-fraud charges in the scandals, also said it will institute other changes and disclosure practices, including a quarterly estimate of mutual-fund expenses for each fund shareholder.”

“But it is the ban on soft-dollar payments that is sure to catch the eye of competitors, and draw even more attention from Wall Street and other financial vendors, some of whom rely on soft-dollar payments for their livelihoods.”

“The practice of using soft dollars is a longstanding but controversial one in the industry, with proponents viewing it as a legitimate way to support research, and detractors calling it inefficient, and some even likening it to kickbacks. The Securities and Exchange Commission has proposed restricting soft dollars. A bill introduced in the Senate would ban them. And the Investment Company Institute, the fund industry’s trade group, supports restriction of the practice, but not elimination.”

“MFS, for its part, has a new nonexecutive chairman, Robert Pozen, who sees the soft-dollar funnel as a lucrative one for brokers, but one that hides the true cost of such services to shareholders. ‘It’s all camouflaged,’ said Mr. Pozen, a former associate general counsel of the SEC. Now, he added, ‘If we want something, if we think it’s valuable, we will pay cash.’ “

“Mutual funds and other institutional investors paid about $12.7 billion in commissions in 2002, about half of which was compensation for research and other forms of soft-dollar services, according to the latest numbers from research firm Greenwich Associates.”

“MFS and other big fund firms now pay about five cents per share for stock trades in ‘bundled’ soft-dollar arrangements that include research and payment for executing trades. The stripped-down, no-research rate at an electronic-trading service might be as low as two cents a share. One reason fund companies bundle research into commissions is that commission payments are subtracted directly from shareholder’s accounts, rather than being taken out of the management fees paid to the fund companies.”

“MFS, a unit of Sun Life Financial Inc., estimates that it will now have to shell out an additional $10 million to $15 million a year out of its own pockets because of its new policy, reducing its mutual-fund advisory fees by 2% annually.”