The Road Not Taken


New York, NY – The following is an interesting retrospective on the SEC’s consistent lack of action regarding the disclosure of how asset managers spend client commissions.  This article is written by regular ResearchWatch reader, Bill George.


How did we get here?

The other other day I had an epiphany.  I thought to myself . . . “self, you really need to perform a ‘reality check’ just to make sure you haven’t imagined some of what you think has happened over the last several months”. Then I thought, a good place to start my ‘reality check’ would be by reviewing the audio transcript of the July 12, 2006 Securities and Exchange Commission “Sunshine Meeting”. This is the public meeting at which Chairman of the SEC Christopher Cox, the SEC Commissioners, and members of the SEC staff discussed then unanimously approved the interpretive release known as, Commission Guidance Regarding Client Commission Practices Under Section 28(e) of The Securities Exchange Act of 1934.

As I listened to the audio transcript again on my computer’s media player I was stunned by the how much interesting detail I had forgotten. I was also impressed by the number of times Christopher Cox, the Commissioners, and the staff mentioned and agreed on the importance and the priority assigned to pending (promised?) interpretive guidance on transparency and disclosure.

The audio transcript of this Sunshine Meeting is 48 minutes and 2 seconds long and is well worth reviewing in its entirety, but if you don’t have the time to do so I believe you can get a good idea of the impressions and hopes created by the participants’ statements by listening to Chairman Cox’s introduction to the meeting in its entirety, then using the slider on your computers’ media player to navigate to what I believe are the most relevant sections of the meeting.

Here is the Link to the July 12, 2006 SEC “Sunshine Meeting”

Slider Position     Brief description of content at this slider position

3:35               Christopher Cox mentions the importance of full brokerage commission disclosure.

8:06               Christopher Cox mentions Commission Sharing Arrangements*

11:36              Robert Colby discusses the conditions that advisors and brokers must meet to have the safe harbor available to them.

12:05              Chairman Cox asks Robert Colby to describe how Commissions Sharing Arrangements* will work under The Guidance. This explanation Includes a discussion about third party research.

16:30              Commissioner Glassman on unbundling and transparency.

23:10              Commissioner Atkins discusses the importance of the next phase of  guidance on disclosure and transparency and bundled commissions.

29:36              Commissioner Atkins asks Donohue, Director of the SEC Division of Investment Management a question, in his answer Director Donohue includes a comment about the importance of the next phase of guidance on transparency and disclosure.

33:29              Commissioner Campos mentions the importance of soft dollars an points to the magnitude of the use of soft dollars. As evidence of the importance of soft dollars Commissioner Campos mentions a study by Greenwich Associates which reports soft dollar usage at almost one billion dollars in 2005. Mr. Compos seems unaware that Greenwich Associates’ estimates of soft dollars have always significantly underestimated institutional soft dollar use because the Greenwich studies report only the soft dollars generated in third-party fully disclosed brokerage, but the Greenwich studies do not report soft dollars generated in bundled undisclosed full-service brokerage arrangements. Under Section 28(e) all commission amounts “paid-up” above the fully-negotiated execution related costs are soft dollars, irrespective of whether those paid-up commissions are used to purchase  third-party research, or proprietary research [as allowed in Section 28(e)] or whether they are used to acquire goods and services that qualify under interpretations of fiduciary discretion (see the attached document titled, Drilling Down)

44:30              Commissioner Annette Nazareth expresses her thoughts on the importance and priority of the next phase of SEC Guidance on disclosure and transparency in all institutional client commission arrangements.

47:00              Vote taken for the unanimous approval of The Guidance.

* At some point after this meeting the SEC changed the definition of Commission Sharing Arrangements and defined a new class of Commission Sharing Arrangement which the SEC gave the name Client Commission Arrangements. This new name seemed to be necessary so that the activity described in Client Commission Arrangements would not violate any of the many regulations designed to prevent abuses which can arise from the splitting and sharing institutional clients’ commissions.

Best Regards

Bill George

See The Road Not Taken by Robert Frost


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