Template:Investment research and the Investment Advisers Act 1940: Difference between revisions

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

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+{{fullanat|sea|28(e)|1934}}
 ===[[Investment research]] and [[Investment Advisers Act]]: a [[safe harbor]] for [[broker/dealers]]===
-Under {{tag|SEC}} guidance to the [[safe harbor]] set out in Section {{seaprov|28(e)}} of the [[Securities Exchange Act of 1934]], “[[commission]]s” may be used to purchase [[investment research|research]] on a [[soft dollar]] basis.
+''Unless there is a [[safe harbor]]''<ref>Just wait!! There IS!</ref>, paying a [[broker/dealer]] for [[investment research]] creates issues under the [[Investment Advisers Act]] because the SEC considers a fee for research “advice” to be “special compensation”, for which a person must be a [[registered investment adviser]]<ref>Details fiends: see Section 202(a)(11) of the [[Investment Advisers Act]].</ref>.
-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.
+Typically, [[broker dealer]]s are not [[registered investment adviser]]s.
+There ''is'', of course, a [[safe harbor]]. I t is set out in Section {{seaprov|28(e)}} of the [[Securities Exchange Act of 1934]]: to qualify for it, a [[broker/dealer]] ’s advice must be “solely incidental” to its provision of “[[broker/dealer]] services”.
-'''It doesn’t apply to [[Synthetic equity swap|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]]).
+Under {{tag|SEC}} guidance to the Section {{seaprov|28(e)}} [[safe harbor]], “[[commission]]s” may be used to purchase [[investment research|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, [[riskless principal]] really being a form of [[quasi-agency]].
+'''[[The safe harbor]] doesn’t apply to [[Synthetic equity swap|swap]] transactions''': By definition swap transactions are bilateral, full-principal contracts. they are not agency or [[riskless principal]]<ref>You could argue this isn't true for delta-one synthetic equity prime brokerage arrangements, it if you know what’s good for you, you wouldn’t.</ref>. The [[swap dealer]] takes a fee (as [[principal]]) that is no sense a “[[commission]]”.  The swap dealer does not act as [[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.
+  ===What does this mean then?====
-Here is the relevant text of Section {{seaprov|28(e)}}:
+This means a US [[broker-dealer]] can provide research to its clients without having to register with the {{tag|SEC}} as an [[investment adviser]] so long as it avoids accepting any "[[special compensation]]" in connection with the research. A bundled trading commission is the traditional means of compensating a broker-dealer for execution and research.
-{{fullanat|sea|28(e)|1934}}
-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====
 *[https://www.sec.gov/rules/interp/34-23170.pdf SEC interpretative guidance]
+{{isia}}