Soft dollars part two: Meanwhile, down south . . .

• Phone lines and data transmission lines;
• Magazines, newspapers, journals and on-line news services;
• Portfolio accounting services;
• Proxy-voting services unrelated to issuer research; and
• Travel expenses incurred in company visits.

Redefining how soft dollars can be used is part of a larger mission by securities regulators to ensure retail firms, be they advisors or broker-dealers, provide their clients with the best possible executions. Greenglass noted soft-dollar arrangements can generate a lot of noise around the ability of regulators, and the firms themselves, to determine execution quality. The arrangements often diminish the amount of commission a broker makes, meaning the firm may not always be motivated to seek out the best price.

The SEC has struggled with requests by U.S. firms for an improved definition of best execution for several years. In 1999, it issued a concept release on market fragmentation that floated the idea of a centralized limit order book to allow direct comparisons of executions.

While the stated purpose behind the release was to assess the impact of third-market trading venues on equities pricing, the commission’s real intent was to drill down and “try to figure out exactly what actually constituted best execution,” according to an SEC associate director. Ultimately, the commission adopted order-routing disclosure rules that require brokers to issue quarterly reports outlining where they send transactions for execution.

Those rules also require market centres, such as NASDAQ and the New York Stock Exchange, to issue monthly reports that include statistical measures of execution quality. A client can compare the reports to determine whether an execution provided by an advisor or broker was consistent with the best prices available in the market at the time.

Filed by Philip Porado, Advisor’s Edge, philip.parado@advisor.rogers.com