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September 12, 2006

Softing Order Management Systems Survives

By Gregory Bresiger

Order management systems and their buyside clients just dodged a regulatory bullet.

For now, regulators say OMSs can still be paid for with commission dollars as "a mixed use" item. That's provided these software applications relate to research or improved brokerage execution.

"We believe that technology now permits managers to obtain research related to the market for securities from many sources and products, and through many delivery mechanisms, including order management systems (OMS) and trade analytical software," the Securities and Exchange wrote recently in its latest guidance on the use of client commissions.

Mixed use means that an item can be "reasonably allocated" between eligible and ineligible commission use. Advice from brokerages on execution strategies also qualifies as eligible as does software that provides these kinds of services.

The initial SEC release on commissions last fall had barred the use of commissions for OMS software, as did the initial release approved by the SEC in early July.

However, the guidance was revised between the SEC vote last month in the proposing release and the issuance of the final release about a week later.

So now these OMSs can continue to qualify for commission payments, according to the SEC, which acknowledged in its final release that it had received dozens of letters on the subject.

"This is definitely a victory for the OMS. We were able to make the case that this is a technology that helps the money manager and the investor," Kristi Wetherington, president of Capital Institutional Services, a broker-dealer that sells agency trading and research to plan sponsors and asset managers. Her firm had sent a comment letter to the SEC and met with commissioners.

An order management system is a software application used by traders and portfolio managers. The application helps them manage their orders.

Wetherington said the OMS officials convinced the SEC that the OMS provides a technology service that is essential to research and brokerage. "They improve executions and reduce costs," she said.