The U.S. Securities and Exchange Commission recently issued a no action letter to Carolina Capital Markets, Inc. confirming that it is permissible to use commissions generated by fixed income securities transactions executed by a broker dealer on an agency basis to purchase research and brokerage services permitted under Section 28(e) of the Securities Exchange Act of 1934.
As we reported back in 2010, it has appeared for a number of years that fixed income transactions were consistent with the safe harbor as long as the trades are executed by a non-positioning broker-dealer on an agency or riskless principal basis, a position that has long been championed by Carolina Capital Markets. The SEC no action letter removes any doubt.
Fixed income transactions have not historically been a large generator of soft dollar commissions in part because the dealer’s compensation is part of the bid/ask spread rather than charged as a commission as with exchange-traded equities. It is likely that the majority of fixed income transactions will continue to be executed on a non-agency basis. Nevertheless, given declining equity commission levels, asset managers may find it worthwhile to execute agency fixed income trades to retain research services in a declining commission environment.