Types of Eligible Securities for Soft Dollar Trades
“Research is the foundation of the money management industry. Providing research is one important, long-standing service of the brokerage business. Soft dollar arrangements have developed as a link between the brokerage industry’s supply of research and the money management industry’s demand for research.”
Securities and Exchange Commission Inspection Report on Soft Dollar Practices of Broker-Dealers, Investment Advisors and Mutual Funds (September 22, 1998)
SEC – Types of Soft Dollar Trades
| Transaction type | % of Advisers Earning Soft Dollar Credits |
|---|---|
| Equities: Listed Agency | 91.1% |
| Equities: OTC Principal | 7.4% |
| Equities: OTC Agency | 41.2% |
| Fixed-Income: Principal | 3.6% |
| Fixed-Income: Agency | 21.3% |
| New Issue Offerings | 20.3% |
| International Equities | 2.0% |
| Options | 3.0% |
Securities and Exchange Commission Inspection Report on Soft Dollar Practices of Broker-Dealers, Investment Advisors and Mutual Funds (September 22, 1998)
Agency Transactions
Fixed income trades have always been eligible on an ‘agency’ basis since Congress created the Safe Harbor in 1975. An agency trade in fixed income is transacted where both the buy and the sell are executed at the same price, and a commission is applied.
Certain Riskless Principal
In 2001, the SEC modified its definition of the term “commission”, making it clear that certain riskless principal and agency transactions fall within the safe harbor. Certain riskless principal transactions for 28(e) are performed when there is a trade-reporting system in place, such as TRACE for corporates/agencies/mbs/abs or MSRB for municipals.
New Issues
In October 2010, FINRA adopted Rule 5141, allowing member firms to provide a portion of their brokerage selling concession to the fiduciary for new issue fixed price offerings so long as the brokerage selling concession pays for research pursuant to Section 28(e).