Template:Investment research and the Investment Advisers Act 1940

Investment research and Investment Advisers Act: a safe harbor for broker/dealers

Under SEC guidance to the safe harbor set out in Section 28(e) of the Securities Exchange Act of 1934, “commissions” may be used to purchase research on a soft dollar basis.

The definition of “commission” is important: a fee that a broker/dealer levies for executing a securities transaction as agent. The SEC extended the safe harbor to certain riskless principal transactions in exchange-listed securities in 2001.

It doesn’t apply to swap transactions: There, the dealer takes a fee (as principal under a bilateral transaction). this is not in a true sense a “commission”. UBS acts as counterparty not an agent (or quasi-agent).

A superbly literalist, non-sensical view of the world, but there you have it. It wouldn’t be the first time, America.

Here is the relevant text of Section 28(e):

Securities Exchange Act Anatomy™ →Go uptown Section 28(e), Securities Exchange Act 1934 (view template) 28(e)(1) No person using the mails, or any means or instrumentality of interstate commerce, in the exercise of investment discretion with respect to an account shall be deemed to have acted unlawfully or to have breached a fiduciary duty under State or Federal law unless expressly provided to the contrary by a law enacted by the Congress or any State subsequent to the date of enactment of the Securities Acts Amendments of 1975 solely by reason of his having caused the account to pay a member of an exchange, broker, or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of an exchange, broker, or dealer would have charged for effecting that transaction, if such person determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such member, broker, or dealer, viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion. This subsection is exclusive and plenary insofar as conduct is covered by the foregoing, unless otherwise expressly provided by contract: Provided, however, That nothing in this subsection shall be construed to impair or limit the power of the Commission under any other provision of this title or otherwise. Template:Anatresources-seaTemplate:Anatnavigation-sea Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Paying a broker-dealer for research outside of an execution commission creates issues under the Investment Advisers Act because an unbundled fee paid for the advice contained in research is considered "special compensation" by the SEC. The receipt of special compensation disqualifies a broker-dealer from avoiding Investment Adviser registration by reliance upon the broker-dealer exclusion (Section 202(a)(11) of the Investment Advisers Act provides a carve-out from registration for a broker-dealer providing advice that is "solely incidental" to the delivery of broker-dealer services). In practice, this means a US broker-dealer can provide research to its sales and trading clients, but avoid having to register with the SEC as an investment adviser so long as the broker-dealer avoids accepting any "special compensation" in connection with the research. A bundled trading commission is a customary and acceptable means of compensating a broker-dealer for traditional services like execution and research.

Resources

• SEC interpretative guidance