“Congress should tighten the rules on ‘soft dollar’ commissions by limiting the types of services that mutual funds can obtain with such payments, the Securities and Exchange Commission said in a report released yesterday,” writes Floyd Norris in today’s New York Times.

“The proposal was made in a report prepared by the S.E.C.’s division of investment management after Representative Richard H. Baker, chairman of the House subcommittee on capital markets, asked wide-ranging questions regarding the regulation of mutual funds.”

“Soft-dollar commissions are used to pay for research in ways that are largely invisible to fund investors. For example, a money manager may agree to pay higher-than-normal commissions on some trades in return for certain research. Such commission costs are included in the performance of the fund but are not broken out separately in fund reports.”

“Restrictions on the services that can be provided for soft dollars could have a substantial effect on the money management industry and would most likely be opposed by many in that business. Conceivably, some costs could be shifted to the money managers, lowering their profits unless they compensated by raising management fees. Those fees, however, are disclosed and are considered by some investors in deciding which funds to buy.”

“In addition, advocates of soft-dollar research argue that the practice enables independent research operations to gain business and that changing the practice could hurt some such firms.”

“In the report, Paul Roye, the commission’s director of investment management, said that he would ask the commission ‘to require advisers to keep better records of the products and services they receive for soft dollars’ but that the commission also thought Congressional action was needed.”

“The commission said that would take the form of amending a law passed in 1975 that created a ‘safe harbor’ for money managers who did not seek the lowest commission costs but instead used the commissions to pay for certain services. Before the end of fixed commissions, research had commonly been provided as part of the package of services paid for with commissions.”

” ‘We believe that after 28 years, it may be appropriate to reconsider’ that provision, the commission report said, ‘or, alternatively, to amend the provision to narrow the scope of the safe harbor.’ “