Among the proposed revisions to mutual fund disclosure rules, the one relating to "soft-dollar" arrangements between fund companies and brokerages is touching off particularly spirited debate.

At this year's Morningstar Investment Conference in Chicago, executives from the fund rating company differed on just how far disclosure should go and on whether soft money was as important an issue as many make it out to be.

Speaking during the opening evening of the conference last Wednesday, Morningstar executive director Don Phillips downplayed the importance of the arrangements, in which mutual fund companies pay broker/dealers fees in order to get "shelf space" at that broker/dealer. Soft-dollar deals are a "basis point issue, not a percentage point issue," Phillips says, meaning that other issues facing the mutual fund industry--including the misallocation of funds, style drift and manager investment discipline--had far more serious financial implications for investors.

But others disagreed, including former Morningstar editor Russell Kinnel, who said in an interview with Registered Rep. that advisors acting in the interests of a client could end up "having an incentive to favor one investment over another."

Legislation proposed by Rep. James Baker (R-La.) would require that fund companies detail what arrangements they enter to get shelf space, including payments made to broker/dealers.

Industry groups have generally been supportive of the enhanced disclosure. Investment Company Institute Chair Paul Haaga said in a statement that the SEC should take action on this and not necessarily wait for legislation.

Meanwhile, exhibitors at the conference generally admitted that soft-dollar arrangements are a necessity for them because it gives them access to the distribution franchises like Merrill Lynch, Smith Barney and other broker/dealers. Fund execs interviewed said that competition among product offerings creates a need for this. "Critical distribution is more limited than the supply of product," said John Carey, director of portfolio management at Pioneer Investments in Boston, who supports greater disclosure.

Not all are as sanguine, however. The Securities Industry Association, in a recent statement, said that soft-dollar arrangements "have increased competition in execution services and enhanced the quality of investment advice provided." The SIA did not take a stand on whether more disclosures are necessary, saying only that they "appreciate" Baker's concerns about "the need to improve current disclosures."

But Kinnel is less equivocal. He believes the process is dirty and that "Sunlight is the best disinfectant."

"The resistance to this is not terribly convincing," he adds.