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

''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>.

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”.

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]]).  

====What does this mean then?====

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.