Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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January 2, 2007

CSAs: Possible Pitfalls

By Editorial Staff

Commission sharing arrangements typically involve three parties: a money manager, an executing broker and a research broker. The money manager in conjunction with his supplier of research, the research broker, will determine the value of the research. He then tells the execution broker, typically an agency, or bulge bracket firm, how much to pay the research broker. There may or may not be an invoice.

"On the money manager side," according to Jim Morrow, chief operating officer of Capital Investment Services, "they have to put new processes in place to deal with who they're going to pay and how much because the money manager's trading desk no longer has to go to that research broker-dealer and say I've got to trade 50,000 shares with you in order to pay you.'"

The sellside has issues to consider as well. A securities attorney, who was previously a regulator with the SEC, foresees possible administrative problems. Larry Bergmann, with Wilkie Farr & Gallagher, says the SEC decision doesn't require execution brokers to obtain invoices for services used through CSAs. However, the SEC did say there must be adequate documentation of the payments made. "So, exactly how the whole documentation shakes out is something that various people are going to have to consider," Bergmann says. He also says the CSA implementation details must be worked out for each shop.

Morrow asks: "If you're a small research broker-dealer, you must have an accounting system that can justify the check you receive. So how do you tie this money to the work you are doing for your client?" He says many broker-dealers don't even want to face this problem and will just use the invoice system.