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November 29, 2005

SEC's Commission Guidance

By Gregory Bresiger

Commission dollars can be spent on research, but they must be restricted to advice, analyses and reports within the meaning of the Section 28(e)(3) of the Securities Exchange Act. Market, financial and similar data are eligible for a safe harbor. That's what Securities and Exchange officials said in a much anticipated interpretative guidance release on commission practices, or what used to be called "soft dollars."

Other brokerage services can also qualify for commission dollars. But the SEC said that only those services that "relate to the execution of the trade from the point at which the money manager communicates with the broker-dealer for the purpose of transmitting an order for execution."

The SEC, in the release, took note of the United Kingdom's Financial Services Authority's recent rules on commissions. Those rules are due to go into effect in June. Non-permitted services, under those rules, are custody charges not incidental to execution, computer hardware, telephone lines and portfolio performance and measurement and valuation services. The FSA also requires unbundling of the various services that are obtained through the use of commission dollars.

The SEC took the FSA's recent work into account in developing its own guidance release. The SEC said its release is "generally consistent" with the work of the FSA. But the American regulator noted there are significant differences between US and UK securities rules. The UK, for example, has no statutory equivalent of 28(e).

Some brokerages had feared that the SEC might require unbundling of commission arrangements because of the FSA. Officials of these firms applauded the SEC release.

John Meserve, president of BNY Research, Commission and Payment Services, said the SEC is moving toward "preserving the safe harbor for research while requiring more transparency." However, Fidelity Investments, a large money manager, said that it was going to move to unbundled research in its commission arrangements with Lehman Brothers. Fidelity said that it will pay for any Lehman research services out of corporate expenses instead of using fund expenses. (See At Deadline).