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January 2, 2007

Brits Differ from Their American Cousins on OMS Spending

By Gregory Bresiger

British regulators are taking a tougher line than their American counterparts on using commission dollars to pay for order management and connectivity services.

The U.K.'s Financial Services Authority (FSA) has proposed a ban on the use of commissions for OMSs and associated software. The move comes just a few months after the Securities and Exchange Commission okayed the use of commissions to pay for OMSs in a new interpretation of Section 28(e). Nevertheless, the SEC's counterparts across the sea held that the use of commission dollars for OMS could hurt clients.

The FSA believes these services are "inconsistent with duties owed to clients and raise potential conflicts of interest," according to the recently proposed amendment to the FSA's Conduct of Business Sourcebook. FSA officials wrote these services are "not related" to the execution. The amendment was open for public comment until December 6.

The FSA's proposal would cover connectivity services, order and execution management services, dedicated telephone lines, electronic trading networks, office administrative computer software and word processing programs.

British regulators previously had permitted using commissions to pay for these services. But, in reversing themselves, they emphasized that they were not stopping trading professionals from buying these services.

"Rather," the FSA wrote, "our position is that the commission charge is not the appropriate charging or payment mechanism for funding the purchase of these goods or services."

Firms can recapture the costs of these programs through the management charge or through specific agreements with clients, the FSA maintains.

However, soft dollar brokerage Capital Institutional Services (CAPIS) chief executive Kristi Wetherington said that her firm would be sending a letter opposing the FSA amendment. Wetherington said that some buysiders would not be able to pay cash for these services if the FSA follows through with the ban.

"Without the use of commissions, it will mean firms will have to pay cash. So in many cases these services will be discontinued," she warned. Wetherington also complained that the FSA OMS guidance, if it becomes final, would lead to a dual regulatory system that would be burdensome for firms conducting business on both sides of the Atlantic.

"That would also put the United Kingdom firms at a disadvantage," she added.