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Robert Schuessler
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A Smarter Monkey

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March 15, 2007

SEC No-Action Letter Okays Non-Broker-Dealers In Commission Management Plans

By Nina Mehta

The Securities and Exchange Commission, in a letter to Goldman Sachs, clarified that commission dollars could be used to pay for research-related services provided by vendors. The "no-action" letter makes clear that money managers may use their clients' commission dollars to purchase qualified research services from both broker-dealers and vendors.

Previously, some in the industry weren't sure that the SEC's rules covering client commission arrangements (CCAs), formerly known as soft dollars, extended to purchases from non-broker-dealers.

In the January letter, the SEC said the staff of the Department of Market Regulation would not seek enforcement action against service providers participating in Goldman's Research XPRESS program if those providers are not registered as broker-dealers. The goods and services they provide must be considered research under the Section 28(e) safe harbor of the 1934 Securities Exchange Act.

Goldman managing director Tom Conigliaro says Goldman requested the letter to assure investment managers that non-broker-dealers could be paid through Research XPRESS, its CCA program.

Some of Goldman's traditional mutual fund clients were reluctant to participate in Research XPRESS because they didn't think the SEC had been crystal clear about whether non-broker-dealers could be included in such arrangements in its July 2006 guidance on how client commissions could be used.

"We were comfortable with how we structured Research XPRESS," Conigliaro says. "But some customers wanted more clarification. Those clients are more comfortable now."

CCAs enable money managers to use executions through the sponsoring broker to create a pool of commissions that can be drawn on to pay for research services. Most bulge-bracket firms and agency brokers now have such programs. Participants in the programs can include both broker-dealers and non-broker-dealers.

CCAs are commonly known as commission-sharing arrangements (CSAs) in industry parlance.

Jay Bennett, a consultant at research firm Greenwich Associates, notes that the SEC last year "blessed" the use of commissions to pay for research. "It's now clear they can be used to pay non-broker-dealers," he says. "[The SEC's no-action letter] lets business as usual go forward through commission management programs."

At least one of Goldman's competitors in the third-party research business welcomed the no-action letter. "We felt comfortable with the SEC's guidance before, but we appreciate it any time the SEC offers further clarification," says John Meserve, a director at giant agency broker BNY ConvergEx Group.