I have a question regarding CFAI Soft Dollar Standards. ‘Safe Harbor’ Protection is available only for securities transactions conducted on an agency basis. Transactions conducted on a principal basis do not qualify for this protection. Does anyone know why exactly?
Because I’m too lzy to look it up does the Safe Harbor here mean that if someone tells you to do the trade with Broker X who always charges Y you can collect as many soft dollars from X as you can get without worry?
I don’t know the extent of protection offered. I only know it protects the manager from claims of breach of fiduciary duty by using client commissions to pay a higher commission for investment research.
I think it is possible that the investment manager could acquire as much research as he/she can through soft dollar arrangements provided the research value is commensurate to the ‘brokerage’ used. The research must also be used for investment decision making process(benefitting the client) and not the for the management of the investment firm. Another thing to note regarding the issue is that agency trades permit the investment manager to obtain research that may not directly benefit the client but the manager must endeavour to ensure that over time, the client receives benefit from research obtained through other clients’ brokerage arrangements. Principal trades on the other hand require that client brokerage be used to benefit the client account generating the brokerage given the existence of a fiduciary requirements (eg. ERISA, Investment Company Act of 1940) and if requirements do not apply, the client’s brokerage can be used to benefit other client accounts (apart from the one generating the brokerage) if this practice is disclosed and prior consent is obtained from the client. Btw, do you think the descriptions for agency and principal trades explain the difference in treatment relating to ‘safe harbor’ protection eligibility?
Yeah, it just means that if someone directs you to trade with a particular broker (i.e., you’re the agent) then they can’t claim you weren’t doing your fiduciary duty by following their instructions.
JoeyDVivre Wrote: ------------------------------------------------------- > Yeah, it just means that if someone directs you to > trade with a particular broker (i.e., you’re the > agent) then they can’t claim you weren’t doing > your fiduciary duty by following their > instructions. CFAI doesn’t give detailed definitions of the agent and principal. They just explain that agent trades refer to a transaction involving a payment of a commission while principal trades are those that involve ‘discounts’ or ‘spreads’. Since I don’t work in this area, I was confused by 1) the significant difference between the two? discounts and spreads sound like commissions in a way too,and 2) the principal and the agent. I decided to search for the terms agency basis and principal basis and this is what came up. I’m wondering if this is what CFAI is also talking about: http://www.investordictionary.com/definition/agency+basis.aspx http://www.investordictionary.com/definition/principal+basis.aspx