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September 28, 2006

Explaining CSAs and Soft Dollars

By Gregory Bresiger

Soft dollars and commission sharing arrangements (CSAs) have often been confused because they are similar, says William Edick, a Washington-based attorney who works with soft-dollar brokers.

Soft dollars is a broad term that people often incorrectly use, Edick says. An example of soft dollars is when a money manager purchases research products that will assist the client. A manager promises to execute with a certain broker, who earns a commission and pays a third party for the manager's research services. The third party has no connection with the broker.

This is not a commission sharing arrangement because the broker is not splitting a commission. The broker is paying one of the manager's bills in exchange for the executions. It is a soft-dollar arrangement.

CSAs are similar but not the same as soft-dollar relationships. Here a money manager finds a broker who is very good at execution. The manager also works with a second broker who is good at research, but doesn't have a top-notch trading desk or technology.

"The first broker will share some commissions with the second broker, who will provide research to the money manager," Edick says. "This is a subset of soft-dollar arrangements, but it is slightly different."

Since 1976, the SEC has considered clamping down on CSAs, along with soft dollars. That's because they were similar in nature to give-ups, which the SEC outlawed in the 1960s.