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

66 Pages Posted: 24 Aug 2020 Last revised: 8 Feb 2023

See all articles by Howell E. Jackson

Howell E. Jackson

Harvard Law School

Jeffery Y. Zhang

University of Michigan Law School

Date Written: April 17, 2022

Abstract

For decades, the bundling of research services into commissions paid for the execution of securities trades has been the focus of policy discussion and academic debate. The practice whereby asset management firms use investor funds to cover research costs, 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 their own research efforts even though those managers charge investors a separate and explicit management fee for advisory services.

Why do soft dollars 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 law-and-economics arguments through the lens of empirical academic research done in the past as well as an emerging new body of empirical studies exploring the impact of MiFID II, an E.U. Directive that severely restricted the use of soft dollar payments in European capital markets as of January 2018. The weight of empirical evidence suggests that the arguments in favor of soft dollars are not robust. 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.

Keywords: Soft Dollars, MiFID II, Bundled Commissions, Fiduciary Duties, Securities Regulation, Global Capital Markets, Institutional Investors

JEL Classification: A11, D02, D14, D61, D82, F65, G18, G20, G21, G23, G24, G28, K22, K23

Suggested Citation

Jackson, Howell Edmunds and Zhang, Jeffery Y., The Law and Economics of Soft Dollars: A Review of the Literature and Evidence from MiFID II (April 17, 2022). Review of Banking and Financial Law, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3673470 or http://dx.doi.org/10.2139/ssrn.3673470

Howell Edmunds Jackson (Contact Author)

Harvard Law School ( email )

Griswald 402
1563 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-5466 (Phone)
617-495-5156 (Fax)

Jeffery Y. Zhang

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

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