EQUITIES
GLOBAL COMMISSION MANAGEMENT
FAQ
What are client commission arrangements?
Broker-dealers typically provide a bundle of services, including research and execution, which are paid for with commissions. The research provided can be either proprietary or non-proprietary.* Because commission dollars pay for the entire bundle of services, the practice of allocating certain of these commission dollars to pay for the research component came to be called “softing” or “soft dollars.” Recently, the term “client commission arrangement” has become prevalent in the industry because it more accurately describes these programs.
What is the basis of soft dollars or, as they are known today, client commission arrangements?
Prior to 1975, commission rates charged by broker-dealers for research and execution services were fixed. In 1975, the Securities and Exchange Commission (SEC) abolished fixed commission rates. With the end of fixed commissions, investment managers were concerned that they might be viewed as breaching a fiduciary duty by causing their clients to pay more than the lowest available commission rate. As a result, Congress created a safe harbor provision in Section 28(e) of the Securities Exchange Act of 1934 that protects investment managers from claims that they breached their fiduciary duty by causing clients to pay more than the lowest available commission rates in exchange for research and execution. In July 2006, the SEC published an 'interpretive release' addressing the scope of 'brokerage and research services' and client commission arrangements under Section 28(e). This guidance was the first major guidance on Section 28(e) since 1986.*
What are the allowable uses of client commissions for third-party research payments under Section 28(e)?
According to Section 28(e), safe harbor research services can include eligible advice and analysis or reports that provide lawful and appropriate assistance to the investment manager's decision-making process. It does not include administrative overhead, such as accounting, record keeping, reporting to clients, and other items of general overhead not specifically related to investment decision making.*
How is a client commission arrangement implemented?
What are the allowable uses of directed expenses programs for hedge funds?
Unlike Registered Investment Advisers (RIAs), hedge fund managers that have decided not to rely on the safe harbor provided by Section 28(e) may use commission credits for many purposes necessary to achieve their funds objectives, as stated in their offering memoranda or other appropriate documents.*
How is a direct expense program implemented?
FAQ
What are client commission arrangements?
Broker-dealers typically provide a bundle of services, including research and execution, which are paid for with commissions. The research provided can be either proprietary or non-proprietary.* Because commission dollars pay for the entire bundle of services, the practice of allocating certain of these commission dollars to pay for the research component came to be called “softing” or “soft dollars.” Recently, the term “client commission arrangement” has become prevalent in the industry because it more accurately describes these programs.
| * | Proprietary research is created and provided by the broker-dealer, including tangible research products as well as access to analysts and traders. Non-proprietary research is created by a third party but provided by the broker-dealer. |
What is the basis of soft dollars or, as they are known today, client commission arrangements?
Prior to 1975, commission rates charged by broker-dealers for research and execution services were fixed. In 1975, the Securities and Exchange Commission (SEC) abolished fixed commission rates. With the end of fixed commissions, investment managers were concerned that they might be viewed as breaching a fiduciary duty by causing their clients to pay more than the lowest available commission rate. As a result, Congress created a safe harbor provision in Section 28(e) of the Securities Exchange Act of 1934 that protects investment managers from claims that they breached their fiduciary duty by causing clients to pay more than the lowest available commission rates in exchange for research and execution. In July 2006, the SEC published an 'interpretive release' addressing the scope of 'brokerage and research services' and client commission arrangements under Section 28(e). This guidance was the first major guidance on Section 28(e) since 1986.*
| * | Investment managers should consult legal counsel regarding any specific soft dollar business to ensure compliance with all applicable state and federal laws. |
What are the allowable uses of client commissions for third-party research payments under Section 28(e)?
According to Section 28(e), safe harbor research services can include eligible advice and analysis or reports that provide lawful and appropriate assistance to the investment manager's decision-making process. It does not include administrative overhead, such as accounting, record keeping, reporting to clients, and other items of general overhead not specifically related to investment decision making.*
| * | Investment managers should consult legal counsel regarding any specific soft dollar business to ensure compliance with all applicable state and federal laws. |
How is a client commission arrangement implemented?
| • | You determine the research services you would like Knight to provide and pay for on your behalf. |
| • | Commission credits can be generated on a ratio basis or by using an execution or cost-plus model. |
| • | To establish a client commission arrangement for your firm, please contact Cheryl Griffith at 201.356.1727 or cgriffith@knight.com. |
What are the allowable uses of directed expenses programs for hedge funds?
Unlike Registered Investment Advisers (RIAs), hedge fund managers that have decided not to rely on the safe harbor provided by Section 28(e) may use commission credits for many purposes necessary to achieve their funds objectives, as stated in their offering memoranda or other appropriate documents.*
| * | Hedge fund managers should consult legal counsel regarding any specific soft dollar or direct expense business to ensure compliance with all applicable state and federal laws. |
How is a direct expense program implemented?
| • | You determine which expenses, allowable under your fund's offering memorandum or other appropriate documents, you would like Knight to pay for on your behalf. |
| • | Commission credits can be generated on a ratio basis or by using a trade execution-plus model. |
| • | To establish a direct expense program, please contact Cheryl Griffith, 201.356.1727 or cgriffith@knight.com. |
|
|
CLIENT LOGIN
