Another SEC No-Action on CCAs


New York-The SEC recently issued another no-action letter in support of client commission arrangements (CCAs), continuing its encouragement of “unbundling” equity research commissions into research and execution components.  The latest no-action letter was issued to Lee Pickard of Pickard and Djinis who was writing on behalf of Capital Institutional Services (CAPIS) to clarify that their form of CCA does not trigger a requirement for non-broker research vendors to register as brokers.

Credits vs. Pool of Commissions

CAPIS is a Dallas based agency broker which has offered soft dollar services for thirty years.  Their CCA program is designed as follows:  “At the outset of the relationship, CAPIS and the money manager negotiate the portion of the agency commissions of the money manager’s client accounts which will be credited for the provision of Research Services. The money manager may periodically request CAPIS to pay a specified dollar amount from these credits for Research Services.”

The concern prompting the no-action request is that if the SEC viewed these credits as transaction-related compensation, it could trigger the requirement for research providers to register as broker dealers.  The receipt of transaction-related compensation is a key factor in the SEC’s consideration whether an entity is ‘engaged in the business’ of transacting securities and subject to broker-dealer registration.

Accordingly, CAPIS requested clarification from the SEC that its CCA would not trigger a registration requirement for non-broker research providers participating in its program:

“Although the CAPIS Program differs from that described in the Goldman, Sachs & Co. no-action letter [issued in January] in that CAPIS pays Research Vendors based upon credits, rather than from a pool of commissions, and CAPIS introduces all of its trades on a fully-disclosed basis to a clearing firm, it is our view that these slight differences do not alter the analysis under Section 15(a) of the Exchange Act as to the registration status of Research Vendors.”

The answer from the SEC was affirmative.

Participating in the Broker Vote?

One of the virtues of the CCA structure is that it potentially allows non-broker research providers to participate in the broker vote process.  Asset managers have historically excluded non-broker third party research from the broker vote process because it was not possible pay them with the commissions allocated through the vote process.  One of the questions is whether the CAPIS CCA structure will allow asset managers to pay for non-broker research through the vote process, or continue to keep it separate.

The CAPIS CCA requires the asset manager to determine a cash value for the research services:  “If the request is for services rendered by a Research Vendor that is not a broker-dealer, the amount to be paid is the cash value of the Research Services provided to the money manager. The money manager is responsible for independently determining the value of the Research Services in accordance with its good faith determination under Section 28(e) of the Exchange Act, although the money manager’s determination may be based on input from the Research Vendor that prepares the Research Services.”

This is similar to the process under Goldman’s CCA, where the money manager also has to determine “specified dollar amounts” for the research paid for out of the commission pool, and, in theory, is consistent with a broker vote process.   In practice,  money managers are used to paying for non-broker research separately from the broker vote process and this may be slow to change.

One of the frustrations for money managers is that it is easier to determine the cash value for third party research, which typically has a defined price, than for most brokerage research.   CCAs of all varieties are putting pressures on both the asset managers and the brokers to assign values to the research.


The key takeaway here is that the SEC appears to be bending over backwards to support the burgeoning growth of CCAs.  Given the similarity of the CAPIS program to existing soft dollar practices, and the SEC’s recent non-action letter to Goldman in January, you could argue that there was no compelling need for the latest no-action letter.

Perhaps this is the Division of Market Regulation’s way of keeping commission transparency moving along while their colleagues in the Division of Investment Management, who typically don’t have to deal with 28(e), continue to work on commission disclosure guidance.

Comment by Bill George:
One of the paragraphs in the above article stops short of addressing a couple of other problems with the bundled undisclosed proprietary services offered by many full-service brokerage firms, I’ve copied and pasted that paragraph here:

“One of the frustrations for money managers is that it is easier to determine the cash value for third party research, which typically has a defined price, than for most brokerage research. CCAs of all varieties are putting pressures on both the asset managers and the brokers to assign values to the research.”

The above quoted paragraph mentions the fact that bundled proprietary research provided by most full-service brokers is not priced, but the quote and the article stop short of mentioning that such proprietary services are typically not even specifically identified.

Because research and other services are not specifically identified or priced in most full-service brokers bundled brokerage arrangements, it‘s difficult or impossible to determine if such bundled proprietary services qualify as research under Section 28(e) or if the services might be services the advisor has received appropriately within the advisor’s fiduciary discretion, and it is also difficult or impossible to determine if the “services” received represent an inappropriate use of institutional clients’ brokerage commissions (e.g. Mutual fund brokerage for “shelf-space”; commissions paid-up for IPO allocation, or late trading consideration).

If you would like to read the original request for a “No Action Letter” and the SEC’s “No Action Letter” response, see:

Pickard & Djinis Request>

SEC Response>


About Author

Leave A Reply