New York – Yesterday took effect the Canadian national instrument titled “Use of Client Brokerage Commissions,” which regulates the obligations of advisors and dealers in connection to products and services obtained with brokerage commissions, or “soft dollars.” The Canadian instrument follows regulations already in place in the US and the UK, where soft dollars must be strictly directed to execution or research.
The new instrument, issued by the Canadian Securities Administrators (CSA), establishes that advisors cannot direct client brokerage commissions to pay for goods and services that are not directly related to execution or research. Goods and services that are allowed to be paid with client brokerage commissions under the new regulation include order management systems, algorithmic trading software, research reports, publications, quantitative analytical software, and market data. Furniture, computer hardware and compliance systems are not included.
The instrument also establishes advisors’ disclosure obligations, which are intended to increase investors’ trust. However, the Canadian Securities Administrators followed the US’s more lenient disclosure rules than the UK’s stricter ones. In a notice on the instrument, the CSA expressed that it has “decided not to proceed with quantitative disclosure requirement at this time,” and that it believes that the narrative disclosure requirements will provide useful information. One of the main reasons to refrain from establishing quantitative requirements, according to the notice, is:
“To go further than the requirements of the SEC or other international regulators at this time would create difficulties for Canadian advisers conducting business in multiple jurisdictions, particularly for those that contract a foreign sub-adviser subject to lesser disclosure requirements in their home jurisdiction (who may not be willing to undertake systems changes to provide the needed information). This could have an impact on costs to Canadian investors, or result in differences in the quality of disclosure.”
As we mentioned in this space, studies have argued that the amount of US soft dollars directed to paying for independent research is expected to increase while the percentage of soft dollars allocated to execution will drop. If the Canadian newly implemented policy on soft dollars follows the US trends, the independent research industry in that country will benefit not only by an increased adoption of this mechanism of payment, but also by the increased allocation of commissions to support research over execution.