No Safe Harbor for Aggregators?


New York, NY – In its July 2006 Interpretive Release, the SEC clarified what products or services they felt were covered under the Section 28(e) safe harbor of the Securities Exchange Act of 1934.  However, a number of experts have recently noted that the SEC is revisiting the topic as the Commission is questioning whether certain types of services – namely research aggregators – might not meet the standard of eligible “research” under the statute.

2006 Interpretive Release Revisited

So, how do we define “research” that is protected under the 28(e) safe harbor?  Based on the 2006 Interpretive Release, the SEC defined “research services” as the provision of advice, either directly or through written publications, regarding the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities; or the provision of analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts.

The SEC also noted that an important common element of “advice,” “analyses,” and “reports” is that each reflects substantive content – that is, the expression of reasoning or knowledge. Thus, in determining whether a product or service is eligible as “research” under Section 28(e), the money manager must conclude that it reflects the expression of reasoning or knowledge and relates to the subject matter identified in Section 28(e).

In its Interpretive Release, the SEC went on to identify various types of products and services it felt were either covered, or not covered under its definition of “research”, including:

Covered Research Services

  1. Traditional research reports analyzing the performance of a particular company or stock;
  2. Discussions with research analysts who furnish advice directly as to the advisability of investing in securities;
  3. Meetings with corporate executives to obtain oral reports on the performance of a company;
  4. Seminars or conferences if they provide substantive content relating to the subject matter in the statute, such as issuers, industries, and securities;
  5. Software that provides analyses of securities portfolios;
  6. Corporate governance research (including corporate governance analytics) and corporate governance rating services that reflect the expression of reasoning or knowledge relating to the subject matter of the statute (for example, if they provide reports and analyses about issuers, which can have a bearing on the companies’ performance outlook);
  7. Research related to the market for securities from many sources and products, and through many delivery mechanisms, including order management systems (“OMS”) and trade analytical software;
  8. Data services, including market data, would be eligible under the safe harbor if the data reflected substantive content related to the subject matter categories identified in Section 28(e).

 Not Covered / Mixed Use Services 

  1. Mass Market Publications;
  2. Inherently Tangible Products and Services;
  3. Proxy services may be treated as mixed-use items.  Reports and analyses on issuers, securities, and the advisability of investing in securities that are transmitted through a proxy service may be within Section 28(e).  The products or services offered by a proxy service provider that handle the mechanical aspects of voting, such as casting, counting, recording, and reporting votes, are administrative overhead expenses of the manager and are not eligible under Section 28(e).

Some Choose “Higher Standard”

Despite the clarity provided by the SEC in its 2006 Interpretive Release, some U.S. asset managers have decided to adopt the “higher standard” with regards to the use of client commissions to pay for “research services”.  For example, a number of asset managers who operate in both the US and UK have chosen to standardize on the rules established in the FSA’s CP 176 to define what type of services can be paid for through the use of client commissions. 

A few of the major differences between the FSA’s and SEC’s rules regarding the use of client commissions is that the FSA does not allow asset managers to use soft commissions to pay for market data that has not been analyzed or manipulated, though managers may be permitted to justify using client commissions to pay for raw data feeds as execution services. The FSA also has identified seminars as “non-permitted” services.  

Are Research Aggregators Research?

Recently, some experts have noted that SEC staffers have been wondering if services that “aggregate” other providers’ data and research (and who charge separately for their research or data), can be defined as “research” under the 28(e) safe harbor. 

Though we have not participated in these conversations, we can understand the questions that have been arising.  The purpose of some aggregators is purely the delivery of other providers’ content, including investment research and market data.  A few examples of these types of aggregation services might include, FactSet, or FirstCall.  

While it is clear to us that the content delivered by these products could be defined as research under the SEC’s guidelines, the delivery platform cannot be defined as such – particularly if investors pay separately for this research content.  Consequently, the fees paid by asset managers for the aggregation and delivery of this content might not be protected under the 28(e) safe harbor as the delivery or aggregation does not reflect the “expression of reasoning and knowledge that is related to the subject matter identified in Section 28(e)”. 

The Consequences

We have discussed this issue with a few asset managers, and all agree that if the SEC decided to ban the use of client commissions to pay for research aggregation services, there would be significant consequences on a few players. 

US money managers would be forced to rewrite their soft dollar policies and change how they pay for these non-permitted services, or they would have to switch to other permitted products.  In addition, the various research aggregators would have to rethink their commercial models to protect as much of their buy-side business as possible.   

Although we cannot say how this would ultimately work out, it is clear to us that redefining research aggregators as a non-permissible service under the 28(e) safe harbor would cause quite a stir among all the parties involved.



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