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August 14, 2007

Goldman Stymied by SEC on CSAs

By Peter Chapman

Also in this article

  • Goldman Stymied by SEC on CSAs
  • Page 2

The Securities and Exchange Commission rebuffed Goldman Sachs and other trading houses in their request for a no-action letter they say would allow them to take checks for their research.

The firms say they need a letter from the SEC exempting them from registering under the Investment Advisers Act of 1940 in order to accept cash payments from the buyside for their research via the popular commission-sharing arrangements or otherwise. As they have not gotten that relief, they cannot participate in the CSAs. To accept hard cash without such relief would force them to comply with rules of the Advisers Act that would bar them from trading on a principal basis with their clients.

Last year they asked the SEC to put down in writing that accepting a check rather than the traditional commission for their research would not be construed as accepting "special compensation" under the Advisers Act. A firm that takes a fee rather than a commission is deemed to have entered into a more intimate relationship with a customer which forbids their taking positions opposite to the client.

The SEC responded to Goldman and the others in April with a six- or seven-page letter asking for more clarification. The regulator did not provide the no-action letter the brokers sought. (The SEC would not comment.)

The request for a no-action letter is viewed by some in the industry, including Goldman's competitors, as a stalling tactic by a group of firms that have no interest in taking checks for their research or participating in the CSAs of their competitors. Broker-dealers who participate in the CSA programs tend to be small and mid-sized brokerages. They invariably see a reduction in orders sent to their trading desks.

Goldman maintains the criticism is simply cheap shots by competitors and that the regulatory risk is real. "Our opinion on this is driven by a keen desire to maintain a certain level of compliance and reputation in the industry," Tom Conigliaro, a Goldman managing director in charge of commission services, told Traders Magazine. "So we are very cautious from that perspective. To the extent we deem this issue to have any gray area attached to it, we are very concerned about moving forward."

The Investment Advisers Act of 1940 is the federal regulatory framework under which money managers and financial planners operate. It has not applied to broker-dealers.

The Financial Planning Association (FPA), however, believes it should apply to retail broker-dealers who charge fees for their services rather than commissions. In recent years it has lobbied hard to force those broker-dealers to comply with the same rules its members do.

But the SEC has sided with the broker-dealers. Two years ago it passed a rule exempting Wall Street from the Advisers Act. The FPA sued to overturn the rule and, in a surprise ruling, the U.S. Court for the District of Columbia Circuit overturned the SEC's exemption in April.

The FPA deems the annual fee brokers receive as "special compensation" as defined by Section 202(a)(11)(C) of the Advisers Act. Goldman and the others are worried that the fee they would receive for their research could also be deemed "special compensation." And if regulated by the Advisers Act, under its Section 206(3), they could not commit capital for trades.