SEC No Action Letter – The Biggest Losers (and Winners)


New York, NY – As we reported last week, the SEC recently sent a no-action letter to BNY Convergex stating that bulge bracket investment banks could receive payment for their proprietary research from other broker-dealers through the use of client commission arrangements without running afoul of the Investment Advisers Act of 1940.  The big question that remains is, “Who are the winners and losers of this development?”

The Biggest Losers

It is clear to us that the biggest losers of the BNY Convergex no-action letter are the bulge bracket investment banks that had previously refused or limited their acceptance of CCA payments for their research from asset managers.  The reason is that asset managers now have regulatory cover to force bulge bracket firms to receive payment for their research by trading with other brokers. 

Consequently, bulge bracket firms will receive less in overall commission payments because clients are not trading with them.  They will lose out on the commissions associated with execution and will only receive a payment for their research.

An example of this might be a bulge bracket bank (Bank A) that previously received $400,000 annually in equity commissions at $.04 per share from a certain asset manager for the provision of both execution services and their proprietary research.  Now that same asset manager could trade with another broker-dealer (Broker B) at the same $.04 per share, and use a CCA to pay Bank A $300,000 for their research, and Broker B $100,000 or $.01 per share for execution.  As a result, Bank A would lose $100,000 in trading revenue (and the profits associated with this).

The Biggest Winners

The biggest winner from the BNY Convergex no-action letter are asset managers who have wanted more flexibility to trade where they want to, and use the research credits generated to pay for any research they use.  Clearly, the no-action letter gives them the leverage to tell their bulge bracket brokers how they want to pay them.

Another large winner of this development are agency brokers and other CSA providers who can now provide their clients with a way to pay bulge bracket firms for their research.  As shown in the example above, these firms can generate $400,000 in trade flow and keep $100,000 in execution revenue by paying Bank A on behalf of their client for their research.

A third winner of the BNY Convergex no-action letter are alternative research providers as the new development creates more of a level playing field for investment research.  Over time, clients’ ability to pay all research providers for their research independently of their decision on where to trade will create more price transparency around bulge bracket research.  This will enable clients to make more informed decisions between different types of research providers based on the value received versus the price paid for the research they consume.

In a strange twist of logic, bulge bracket research departments might also be a winner of this development.  As mentioned in the example above, Bank A previously received $400,000 for both their research and execution.  Internally, Bank A allocated some portion of this to trading and some portion of this to research.  Let’s assume that the internal allocation was 50/50 (a real allocation used by some Wall Street firms).  Consequently, the research department was credited $200,000 in revenue from this client.  However, if the asset manager uses a CCA to pay Bank A for their proprietary research, the bulge bracket firm may now receive $300,000 from the same client for this research.  Obviously, the trading desk loses; the firm overall loses; while the research department wins.

Potential Consequences

What might the consequences be of this development?  If asset managers start using third-party CSA brokers to execute their trades and pay for the bulge bracket research they use, we could see bulge bracket firms scale down their more costly high touch trading desks and focus more on low touch trading.  In addition, some bulge bracket firms that produce high value research might decide to allocate more resources to their more profitable research departments.


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  1. The SEC’s / BNY Convergex ‘No Action Letter’ inspires hope for a new level competitive playing field between institutional agency brokers, independent third-party research providers and bulge bracket brokers?

    I can understand how the SEC’s / BNY Convergex ‘No-Action Letter’ might inspire hope for a new level competitive playing field, particularly for those who work at agency brokerage firms and those who work at independent third-party investment research providers.

    I can also understand how this SEC ‘No-Action Letter’ might influence some institutional advisors to actually fully-negotiate their ‘execution only’ brokerage commission rate with their brokerage providers. And, I can see how the SEC / BNY Convergex ‘No Action Letter’ might motivate some advisors to pressure their bulge bracket (investment banking) full-service brokers to identify and price ‘the proprietary services’ they provide in exchange for the advisors’ clients’ soft dollar commissions. That is, soft dollar brokerage commissions which the advisor agrees to “pay-up” above the fully-negotiated costs of execution. And, I’m sure if such identification and pricing of ‘the bundled proprietary services’ exchanged for “paid-up” soft dollars were to actually happen it would allow for better transparency and disclosure, which would benefit equal enforcement of Section 28(e)* if the SEC ever decided to begin to enforce the Section 28(e)* equally.

    However, I believe any optimism that the SEC / Convergex ‘No Action Letter’ might inspire a level competitive playing field should be tempered with the practical realization that the exchange of bundled undisclosed ‘brokerage services’ for institutional advisors’ clients’ soft dollar brokerage commissions can provide ‘cover’ for unidentified quid pro quos which some advisors and some full-service brokerage firms enjoy sharing. Quid pro quos which in the past have created conficts of interest and suspicion of breached fiduciary duty. [e.g. order flow (commissions) for: mutual fund shelf-space, IPO allocation and IPO flipping consideration, wrap account introductions, late trading favors, bachelor parties].
    * Section 28(e) of the Securities Exchange Act of 1934 (as amended in 1975).

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