SEC Revises Stance on Non-Broker Research Providers


New York – Yesterday, we reported that the SEC had recently issued a “no action” letter in response to a question from Goldman Sachs about whether research providers who participated in its Research XPRESS platform needed to be registered as broker dealers to be paid out of a pool of client commissions. The letter we reported on was sent on January 17, 2007. This letter has been revised and the revision was dated January 30, 2007.

As far as we can discern, the letters differ in only two respects:

First, paragraph two of the revised letter has changed the reference of Commission Sharing Arrangements (CSAs) to Client Commission Arrangements (CCAs). The SEC indicated that it would not recommend enforcement if the research providers, who were not broker dealers, received payment from this CCA pool. As we pointed out in yesterday’s article there is a significant difference between CSAs (either the US or the UK definition) and CCAs.

A CSA, while similar to a CCA, is different in one very important respect – both participants in the arrangement must be broker-dealers (including the executing broker and the introducing broker).  Therefore, it is not surprising that the SEC revised its verbiage to the Client Commission Arrangement.

Second, the revised letter includes a new footnote 2 which reads as follows:

“2 Through the Research XPRESS~pr ogram, a money manager directs GS&Co. to record client commissions generated from transactions executed through GS&Co. in a separate pool. The money manager periodically directs GS&Co. to pay specified dollar amounts from that pool for Research Services.”

The significance of footnote 2 seems to be the fact that the money manager has all of the discretion as to the amount of the payment to the research provider. Additionally, Goldman must establish a “separate pool” of commissions specifically to pay for brokerage and non brokerage research. Under these conditions the research provider who occasionally receives directed payments from the money manager will not need to be an introducing broker.

In light of the revised letter, is seems that the door is open for research providers to be paid out of a commission pool, as long as the arrangements fulfill the requirements of a CCA.  Real commission sharing (payments based on a flow of transactions), will require a CSA where both parties to the arrangement (the research provider and the execution provider) are both broker-dealers.


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