CSA Shenanigans


New York, NY – In the wake of the SEC’s August 2006 interpretive guidance, CSAs and CCAs were heralded as one payment solution which would make it considerably easier for alternative research firms to get paid.  However, recently some indie research firms have complained that buy-side clients have been fiddling with their CSA / CCA payments to reduce the amount they are paid – by up to half.

Historically, buy-side investors would use third-party research for some period of time (for example, 6 months) and then would take a vote of all analysts, PMs and traders to determine how much they valued the various research sources they used.  Buy-side broker liaisons would then determine what percentage of the vote all of their research providers received, and would then apply this vote percentage to the research commission pool to determine how much they should be paid for the coming six months. 

Once this was determined, they would decide how to pay the provider – either by cutting them a check, trading with the firm, or having a third-party broker pay them from their CSA or soft dollar commission balances.  This means that external research firms were getting paid on a lagging basis.

Some buy-side clients, however, require that third-party research firms submit invoices to them for the amount they agreed to pay.  Most research firms are grudgingly willing to accept the fact that they “gave away” their research for the first six months.  However, thereafter, they expect to be paid in advance based on the broker vote for the previous six months.  Consequently, the invoices they submit are for the coming six months.  Herein lies the rub.

Some buy-side firms, including Lord Abbot, Wellington Management, Lazard, and Putnam, have decided to change the way they pay their research providers.  Now they are holding onto their invoices and paying their research providers after they have received services rather than in advance.  This means that in the year they make this change, these buy-side clients are reducing what they pay for their third-party research by 50%, since they will only have one payment period, versus two.

Of course, these buy-side firms argue that going forward their research providers will be paid twice per year.  However, it is absolutely clear that alternative research firms will NEVER make up for the six months they lost when the buy-side firms switched to paying in for their research after the fact.

Perhaps this move was an innocent administrative change, or maybe it was part of an overt decision on the part of these buy-side investors to reduce their 2010 research payments.  Given the feedback we have received from some alternative research firms, we think these buy-side firms were trying to find some way to reduce their research commission payouts – particularly as some of these firms are experiencing commission shortfalls this year. 

Regardless of intent, a number of alternative research firms have been impacted by this development – prompting up to a 50% reduction in the revenues they expect to receive from these clients in 2010.


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