Alliance Goes On the Offensive In Support of Soft Dollars


New York, NY – Yesterday, we posted a blog discussing a letter written by The Alliance to Support Independent Research last week to SEC Chairman, Christopher Cox, urging that he reconsider his recommendation to Congress that they eliminate the 28(e) soft dollar safe harbor.  Today, the Alliance distributed a Press Release discussing their major concerns with the Chairman’s arguments.

Timothy Conway, Director of Knight Equity Trading, L.P. and a member of the Alliance in Support of Independent Research, explained “The industry needs to be concerned about Chairman Cox’s request to Senator Dodd and Representive Barney Franks and go on the offensive to insure that the consequences and impact of such a move are clearly vetted.”

One interesting point raised by the Press Release, was a direct contradiction of Chairman Cox’s recent statements that the industry’s use of soft dollars was fraught with abuses.  However, the Alliance noted that, according to their extensive research, they could only discover three cases since 1998, where the Commission initiated disciplinary actions due to inpermissable use of client commissions.   However, in none of these cases did money managers rely on the 28(e) safe harbor for their behavior.

The entire text of today’s Press Release is included below.



c/o  Pickard and Djinis LLP

Attorneys at Law

1990 M Street, N.W.

Washington, D.C. 20036

The Alliance in Support of Independent Research Urges Chairman Cox

to Reconsider Call to Repeal Section 28(e)

Argues Move Would Harm Investors; Finds Chairman’s Concerns Misplaced

Washington, D.C., June 25, 2007- The Alliance in Support of Independent Research wrote to U.S. Securities and Exchange Commission Chairman Christopher Cox on June 20, 2007 asking him to reconsider his recent request that Congress adopt legislation to repeal or substantially revise Section 28(e) of the Securities and Exchange Act of 1934.  Section 28(e) provides a safe harbor for the provision of research services in exchange for commissions from managed accounts.  The Alliance’s letter asks the Chairman to instead focus the Commission’s efforts on completing the implementation of the recommendations of the SEC’s Soft Dollar Task Force, convened in 2004 to study client commission arrangements.

Lee Pickard, Counsel to the Alliance in Support of Independent Research, Managing Partner of Pickard and Djinis LLP and former Director of the SEC’s Division of Market Regulation, said, “The repeal of Section 28(e) would drastically reduce the flow of investment research to asset managers, to the detriment of both small and large investors.  It would also cripple the independent research industry and impair the ability of small money managers and their investment funds to compete with their larger peers.”

Although the Chairman has cited purported abuses in the use of soft dollars, the Alliance notes that its review of Commission disciplinary actions since 1998 revealed only three cases involving the impermissible use of client commissions for services involving conduct which occurred subsequent to the SEC’s sweeping 1998 Soft Dollar Inspection Report.  None of these actions involved money managers who purported to rely on the Section 28(e) safe harbor to justify their behavior.

The Alliance points out that the SEC formed a Soft Dollar Task Force in 2004, comprised of Staff from five of the Commission’s divisions.  Although one of the issues the Task Force studied was whether the SEC should ask Congress to repeal Section 28(e), the Task Force instead recommended retaining the safe harbor, narrowing the scope of eligible research services, providing additional guidance regarding the structure of client commission arrangements, and studying whether such arrangements should be further disclosed to investors.  In July 2006, the SEC acted on the Task Force’s first two recommendations, adopting an interpretation of Section 28(e) that redefined the scope of research services which could be delivered under the safe harbor while providing guidance regarding acceptable structures for client commission arrangements.

The Commission’s next step, which was discussed at the open meeting announcing the July 2006 Release, was supposed to be addressing transparency and disclosure issues related to the use of client commissions.  The Alliance letter notes that the SEC’s July 2006 Release has been almost universally well received, and questions why the Chairman would choose to approach Congress at this time, rather than implementing the second step of the SEC’s announced plan.

The Alliance’s letter also notes that the repeal of Section 28(e) would have a disproportionately negative effect on small investors.  Hedge funds, which are only available to high net worth investors, can be structured so as to not require the protection of the safe harbor to receive research through the portfolio execution process.  The ability of hedge funds to use a payment mechanism for research not available to investment vehicles serving retail investors (e.g., mutual funds and pension funds) would cause the best investment ideas to flow to hedge funds, to the disadvantage of smaller investors.

The Alliance in Support of Independent Research believes that the elimination of the Section 28(e) safe harbor would harm independent research firms, competition and retail investors.  There is no reason to make major changes to a practice which has served the markets well for almost thirty years especially when Section 28(e) arrangements have not been the source of any significant abuse.  The Alliance urges the Commission continue its efforts to implement the second part of its announced program to address client commission arrangements, namely examining whether additional transparency is needed in respect of such arrangements.

# # #

Members of the Alliance in Support of Independent Research ( share a common interest in fostering a favorable regulatory environment in which research services and products may be furnished to the money management community, and in preserving the umbrella of protection Section 28(e) of the Securities Exchange Act of 1934 provides to fiduciaries who receive all forms of investment research.  The leading members of the Alliance in Support of Independent Research (“Alliance”) include the following broker-dealers:

BNY ConvergEx Group

John D. Meserve, Director

Capital Institutional Services, Inc.

Kristi P. Wetherington, President and CEO

E*TRADE Brokerage Services, Inc., a subsidiary of E*TRADE Capital Markets, LLC

Jennifer A. Connors, Senior Vice President, Global Head of Compliance

Knight Equity Markets, L.P.

Timothy J. Conway, Director

The Interstate Group Division of Morgan Keegan & Co., Inc.

Grady G. Thomas, Jr., President

Our members are involved in a significant portion of the arrangements under which fiduciaries such as mutual fund managers, investment advisers, banks and other fiduciaries are provided with independent research services and products for the benefit of their managed accounts.

Contact:          Lee A. Pickard

William D. Edick


Pickard and Djinis LLP

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