SEC releases new interpretive guidance on soft dollar arrangements

Abstract

Purpose

To describe and analyze in detail an Interpretive Release (the “2006 Interpretation”) approved on July 12, 2006 by the US Securities and Exchange Commission (“SEC”) regarding the soft dollar safe harbor under Section 28(e) of the Securities Exchange Act of 1934.

Design/methodology/approach

Following a brief discussion of the history of soft dollars, describes and analyzes in greater detail relevant aspects of the 2006 Interpretation, including an explanation of the three‐part test concerning the use of soft dollars to pay for products and services under the safe harbor, a discussion of “mixed use” items, further detail on soft dollar arrangements, an explanation of liabilities and obligations of managers and broker dealers, and an implementation timeline.

Findings

Under the 2006 Interpretation, a money manager may rely on the safe harbor to acquire products or services only upon satisfaction of each part of a three‐part test. First, does the product or service meet the eligibility criteria of Section 28(e)(3)? Second, does the eligible product or service provide lawful and appropriate assistance in the performance of relevant responsibilities? Finally, may the money manager properly conclude, in good faith, that the commissions paid are reasonable in relation to the value of the research and brokerage products and services provided by the broker (in relation either to the particular transaction or to the money manager's overall responsibilities with respect to discretionary accounts)? The 2006 Interpretation also is relevant to broker‐dealers who may receive soft dollars. Under Section 28(e), a money manager can pay soft dollars only to broker‐dealers who “provide” research or brokerage services and “effect” transactions. Under the 2006 Interpretation, the circumstances under which broker‐dealers will be seen as “providing” services and “effecting” transactions will be interpreted more broadly than under past interpretations, allowing brokers and money managers greater flexibility to structure soft dollar and commission‐sharing arrangements in a manner that will better serve the interests of investors.

Originality/value

Provides a detailed analysis of the 2006 Interpretation concerning soft dollars.

Citation

Kaswell, S.J., Rosenblat, A. and Sherman, M.L. (2006), "SEC releases new interpretive guidance on soft dollar arrangements", Journal of Investment Compliance, Vol. 7 No. 3, pp. 4-24. https://doi.org/10.1108/15285810610711437