Agency Trade refers to a transaction involving the payment of a commission. Mixed-Use refers to services and/or products, provided to an Investment Manager by a Broker through a Brokerage Arrangement, that have the capacity to be used for both the Investment Decision-Making Process and management of the investment firm. Principal Trade refers to a transaction involving a “discount” or a “spread.” Soft Dollar Arrangements include Proprietary and Third-Party Research Arrangements but do not include Client-Directed Brokerage Arrangements. Soft Dollar Arrangements are sometimes referred to herein as Investment Manager-Directed Brokerage Arrangements, where applicable. Brokerage is the property of the Client. The Investment Manager has an ongoing duty to ensure the quality of transactions effected on behalf of its Client, including a. seeking to obtain Best Execution, b. minimizing transaction costs, and c. using Client Required Reevaluate the Mixed-Use Research allocation at least annually. The Investment Manager must not use Brokerage from another Client account to pay for a product or service purchased under the Client-Directed Brokerage Arrangement. Recommended Agency Trades. While it is permissible for the Investment Manager to use a Client’s Brokerage derived from Agency Trades to obtain Research that may not directly benefit that particular Client at that particular time, the Investment Manager should endeavor to ensure that, over a reasonable period of time, the Client receives the benefit of Research purchased with other Clients’ Brokerage. Recommended Principal Trades. The Investment Manager should determine if the particular Principal Trade is subject to certain fiduciary requirements (e.g., ERISA, Investment Company Act of 1940) which require that Client Brokerage derived from Principal Trades must benefit the Client account generating the Brokerage. If such requirements do not apply, it is permissible to use Client Brokerage derived from Principal Trades to benefit Client accounts other than the account generating the Brokerage if the Investment Manager discloses this practice and obtains prior consent from the Client. Client-Directed Brokerage Arrangement. - Recommended The Investment Manager should disclose to the Client: a. the Investment Manager’s duty to continue to seek to obtain Best Execution, and b. that arrangements that require the Investment Manager to commit a certain percentage of Brokerage may affect the Investment Manager’s ability to (i) seek to obtain Best Execution and (ii) obtain adequate Research. 3. The Investment Manager should attempt to structure the Client-Directed Brokerage Arrangement in a manner that comports with Appendix A to the Soft Dollar Standards (Exhibit A to this Topical Study). Disclosures A. An Investment Manager must clearly disclose, with specificity and in “plain language,” its policies with respect to all Soft Dollar Arrangements, including: 1. To Clients and potential Clients. An Investment Manager must disclose whether it may use the Research to benefit Clients other than those whose trades generated the Brokerage. This disclosure must address whether the trades generating the Brokerage involved transactions conducted on a principal basis. 2. To Clients. An Investment Manager must disclose (i) the types of Research received through Proprietary or Third-Party Research Arrangements; (ii) the extent of use; and (iii) whether any affiliated Broker is involved. Imp The disclosures required or recommended in the Soft Dollar Standards do not contemplate an “unbundling” of Proprietary Research Arrangements. Instead, the description of Research should, in the judgment of the Investment Manager, provide Clients with the ability to understand the type of Research involved in the degree of detail appropriate to the source of the Research. Disclosures To claim compliance with these Standards for any Client account, an Investment Manager must provide the Client with a statement that any Soft Dollar Arrangements with respect to the particular Client account comport with the CFA Institute Soft Dollar Standards. This statement must be provided at least annually. Disclosures Additional information in accordance with the CFA. Such additional information should include the following on at least an annual basis: 1. On a firmwide basis. A description of the products and services that were received from Brokers pursuant to a Soft Dollar Arrangement, regardless of whether the product or service derives from Proprietary or Third- Party Research Arrangements, detailed by Broker. 2. For a specific Client account: a. the total amount of Commissions generated for that Client through a Soft Dollar Arrangement, detailed by Broker; and b. the total amount of Brokerage directed by that Client through Directed 3. The aggregate percentage of the Investment Manager’s Brokerage derived from Client-Directed Brokerage Arrangements and the amount of that Client’s Directed Brokerage, as a percentage of that aggregate. a. The Investment Manager is not obligated to report amounts of Client-Directed Brokerage that constitute less than 10 percent of the Manager’s aggregate amount of Client-Directed Brokerage. Recommended When requested by a Client: D. The Investment Manager should provide a description of the product or service obtained through Brokerage generated from the Client’s account. E. The Investment Manager should provide the aggregate dollar amount of Brokerage paid from all accounts over which the Manager has Investment Discretion. Tricky XYZ could reasonably conclude that the component parts (i.e., television sets, individual financial news services, and cable or satellite providers) are necessary for the total service to assist XYZ in its Investment Decision-Making Process. Thus, the service is potentially eligible to be paid for with client brokerage, provided that the total service satisfies the next level of analysis However, if XYZ uses the Bloomberg Service and terminal to allow Clients to access financial information, the primary use of the service would not be to assist XYZ in its Investment Decision-Making Process, and the service would not qualify as Research under the CFA Institute Soft Dollar Standards.
1 Like
awesome…great review