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Why Do Exchanges Own Multiple Licenses? It's Not Hard To See, Look at the SEC

In this recent research note, Sandler O'Neill + Partners, L.P. Principal Richard Repetto examines why the public exchange operators hold multiple licenses and that rationale behind this phenomenon.

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September 10, 2007

Schumer Faces Off with Cox

Cox Queried on His Recent Stance on Soft Dollars

By Peter Chapman

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On July 31, Securities and Exchange Chairman Christopher Cox testified before the Senate Banking Committee. Among the many issues broached was soft dollars. Two months prior, Cox had sent letters to the Senate banking and House financial services committees imploring representatives to "consider legislation that would repeal or substantially revise Section 28(e)." That is the section of the Securities Exchange Act of 1934 that permits money managers to use their customers' commission dollars to pay for research. The letter was unexpected and unwelcome in many quarters of Wall Street and Washington. Most industry executives and legal types had believed the soft dollar issue was mostly closed after the SEC issued an "interpretation" last July clarifying and narrowing the definition of research. Sen. Charles Schumer (D-N.Y.), a member of the

banking committee, and closely identified with Wall Street, especially took umbrage with Cox's letter. Schumer responded with his own letter, in which he questioned the need for Congress to act and emphasized his hope that the SEC would soon produce guidance on soft dollars disclosure. At the hearing, the New York senator expressed his displeasure with Cox's move and questioned the need for legislative action. For his part, Cox, despite his letter's critical stance, struck a conciliatory tone. Below are excerpts from the hearing.

Schumer: I've always believed there should be a vibrant independent research industry- well-regulated to protect investors. So I applauded the steps you took when you first became chairman to speed up the new process of issuing the new guidance on the appropriate use of soft dollars, which culminated in a unanimous SEC interpretive release in July of 2006.

Soft dollars, as we know, are critical to independent research, and the SEC's release was an important first step in providing clarity on the appropriate use of soft dollar payments. There have been abuses, but we don't want to throw out the baby with the bathwater. But this guidance by itself is not sufficient, as many people have pointed out. Disclosure rules are still necessary, and you acknowledged this when you publicly agreed to create new disclosure rules on soft dollars. Disclosure rules, if well crafted, would allow fund investors, managers and boards to see how their commission dollars are spent and evaluate the value of independent research. Since that time, when everyone thought we were making great progress, we haven't heard of any new developments on SEC soft dollar disclosure rules. Instead, you sent, at least in my view, an unexpected, and, I think, inappropriate letter when you suggested that legislative intervention to fix the abuses of soft dollars was required. This came as a huge surprise, because it was unclear what evidence there was of soft dollar abuses. Since the SEC issued a report on soft dollars in 1998, there have only been three SEC enforcement actions involving client commissions-none of them involve 28(e).