61700 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

1An adviser has a fundamental obligation under 

the Investment Advisers Act of 1940 (‘‘Advisers 

Act’’) [15 U.S.C. 80b–1] and state law, to act in the 

best interest of his client. See SEC v. Capital Gains 

Research Bureau, Inc., 375 U.S. 180, 189–191 

(1963). ‘‘As a fiduciary, a money manager has an 

obligation to obtain ‘best execution’ of clients’ 

transactions under the circumstances of the 

particular transaction.’’ Exchange Act Release No. 

23170 (Apr. 23, 1986), 51 FR 16004, 16011 (Apr. 30, 

1986) (‘‘1986 Release’’). See also Delaware 

Management Co., 43 SEC 392, 396 (1967). The 

fundamental obligation of the adviser to act in the 

best interest of his client also generally precludes 

the adviser from using client assets for the adviser’s 

own benefit or the benefit of other clients, at least 

without client consent. See Restatement (Second) of 

Trusts Section 170 cmt. a, Section 216 (1959). 

2Exchange Act Release No. 35375 (Feb. 14, 1995), 

60 FR 9750, 9751 (Feb. 21, 1995) (‘‘1995 Rule 

Proposal’’) (the Commission took no further action 

on this proposal). See also Sage Advisory Services 

LLC, Exchange Act Release No. 44600, 75 SEC 

Docket 1073 (July 27, 2001) (Commission charged 

that adviser churned advised account to generate 

client commission credits to pay personal operating 

expenses and failed to seek to obtain best execution 

by causing account to pay commissions twice the 

rate the same broker charged other customers for 

comparable services). 

To avoid confusion that may arise over the usage 

of the phrase ‘‘soft dollars,’’ in this release, the 

Commission uses the term ‘‘client commission’’ 

practices or arrangements to refer to practices under 

Section 28(e). 

3 15 U.S.C. 78bb(e). 

4 15 U.S.C. 78a. 

5See Securities Acts Amendments of 1975, Pub. 

L. 94–29, 89 Stat. 97, 161–62 (1975). 

Congressional enactment of Section 28(e) did not 

alter the money manager’s duty to seek best 

execution. See 1986 Release, 51 FR at 16011. The 

directors of an investment company have a 

continuing fiduciary duty to oversee the company’s 

brokerage practices. See Investment Company Act 

Release No. 11662 (Mar. 4, 1981), 46 FR 16012 

(Mar. 10, 1981). In addition, the directors have an 

obligation in connection with their review of the 

fund’s investment advisory contract to review the 

adviser’s compensation, including any ‘‘soft dollar’’ 

benefits the adviser may receive from fund 

brokerage. See 1986 Release, 51 FR at 16010. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 241 

[Release No. 34–52635; File No. S7–09–05] 

Commission Guidance Regarding 

Client Commission Practices Under 

Section 28(e) of the Securities 

Exchange Act of 1934 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed interpretation; request 

for comment. 

SUMMARY: The Securities and Exchange 

Commission is publishing for comment 

this interpretive release with respect to 

client commission practices under 

Section 28(e) of the Securities Exchange 

Act of 1934 (‘‘Exchange Act’’). Section 

28(e) of the Exchange Act establishes a 

safe harbor that allows money managers 

to use client funds to purchase 

‘‘brokerage and research services’’ for 

their managed accounts under certain 

circumstances without breaching their 

fiduciary duties to clients. In light of the 

Commission’s experience with Section 

28(e) and in recognition of changing 

market conditions, the Commission is 

proposing to provide further guidance 

on money managers’ use of client assets 

to pay for research and brokerage 

services under Section 28(e) of the 

Exchange Act. This release also 

reiterates the statutory requirement that 

money managers must make a good faith 

determination that commissions paid 

are reasonable in relation to the value of 

the products and services provided by 

broker-dealers and that broker-dealers 

must be financially responsible for the 

brokerage and research products that 

they provide to money managers and 

must be involved in ‘‘effecting’’ the 

trade. 

DATES: Comments should be received on 

or before November 25, 2005. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/interp.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–09–05 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate to 

Jonathan G. Katz, Secretary, Securities 

and Exchange Commission, 100 F 

Street, NE., Washington, DC 20549– 

9303. 

All submissions should refer to File 

Number S7–09–05. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/interp.shtml). 

Comments are also available for public 

inspection and copying in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549. All comments received will be 

posted without change; we do not edit 

personal identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: Jo 

Anne Swindler, Assistant Director, at 

(202) 551–5750; Patrick M. Joyce, 

Special Counsel, at (202) 551–5758; 

Stanley C. Macel, IV, Special Counsel, at 

(202) 551–5755; or Marlon Quintanilla 

Paz, Special Counsel, at (202) 551–5756, 

in the Office of Enforcement Liaison and 

Institutional Trading, Division of Market 

Regulation, United States Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–6628. 

SUPPLEMENTARY INFORMATION: 

I. Introduction and Summary 

Section 28(e) of the Exchange Act 

establishes a safe harbor that allows 

money managers to use client funds to 

purchase ‘‘brokerage and research 

services’’ for their managed accounts 

under certain circumstances without 

breaching their fiduciary duties to 

clients. In this release, the Commission 

is proposing to issue interpretive 

guidance with respect to the safe harbor, 

with the particular goal of clarifying the 

scope of ‘‘brokerage and research 

services’’ in the light of evolving 

technologies and industry practices. The 

Commission invites public comment on 

its proposed interpretive guidance. 

Fiduciary principles require money 

managers to seek the best execution for 

client trades, and limit money managers 

from using client assets for their own 

benefit.1 Use of client commissions to 

pay for research and brokerage services 

presents money managers with 

significant conflicts of interest, and may 

give incentives for managers to 

disregard their best execution 

obligations when directing orders to 

obtain client commission services as 

well as to trade client securities 

inappropriately in order to earn credits 

for client commission services.2

Recognizing the value of research in 

managing client accounts, however, 

Congress enacted Section 28(e) 3 of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 4 to provide a safe 

harbor that protects money managers 

from liability for a breach of fiduciary 

duty solely on the basis that they paid 

more than the lowest commission rate 

in order to receive ‘‘brokerage and 

research services’’ provided by a brokerdealer if the managers determined in 

good faith that the amount of the 

commission was reasonable in relation 

to the value of the brokerage and 

research services received.5

As discussed below in Part II, over the 

past thirty years, the Commission has 

issued several releases interpreting the 

Section 28(e) safe harbor. In 1998, the 

Commission published a report of its 

Office of Compliance Inspections and 

Examinations (‘‘OCIE’’) detailing a staff 

review of client commission practices at 

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61701 

6See infra note 25. 

7 15 U.S.C. 78bb(e). The Commission also is 

considering whether at a later time to propose 

requirements for disclosure and recordkeeping of 

client commission arrangements. 

In 2004, Chairman William H. Donaldson created 

an agency-wide Task Force on Soft Dollars, which 

conducted a thorough review of client commission 

practices. 

8 15 U.S.C. 78bb(e)(3). 

9See U.S. Securities and Exchange Commission, 

Institutional Investor Study Report, H.R. Doc. No. 

64, 92d Cong., 1st Sess., Vol. 4, at 2206 (1971). See 

also U.S. Securities and Exchange Commission, 

Special Study of Securities Markets, H.R. Doc. No. 

88–95, pt. 2, at 323 (1963) (‘‘Special Study’’). 

10See generally Senate Comm. on Banking, 

Housing and Urban Affairs, Securities Industry 

Study Report of the Subcommittee on Securities, S. 

Doc. No. 93–13 (1973). 

11 17 CFR 240.19b–3. Rule 19b–3 was codified in 

certain respects by Section 6(e)(1) of the Exchange 

Act [15 U.S.C. 78f(e)(1)], which was enacted as part 

of the Securities Acts Amendments of 1975, Pub. 

L. 94–29, 89 Stat. 97, 107–08 (1975). See also 

Exchange Act Release No. 26180 (Oct. 14, 1988), 53 

FR 41205 (Oct. 20, 1988) (rescinding Rule 19b–3). 

12See Exchange Act Release No. 11203 (Jan. 23, 

1975), 40 FR 7394 (Feb. 20, 1975). 

13See Securities Acts Amendments of 1975, Pub. 

L. 94–29, 89 Stat. 97, 107–08 (1975) (enacting 

Section 6(e)(1) of the Exchange Act [15 U.S.C. 

78f(e)(1)]). See generally Senate Comm. on Banking, 

Housing and Urban Affairs, Securities Acts 

Amendments of 1975, S. Rep. No. 94–75, at 69 

(1975), reprinted in 1975 U.S.C.C.A.N. 179, 247; 

House Comm. on Interstate and Foreign Commerce, 

Securities Reform Act of 1975, H.R. Rep. No. 94–

123 (1975); Joint Explanatory Statement of the 

Comm. of Conference, Securities Acts Amendments 

of 1975, H.R. Conf. Rep. No. 94–229, at 108 (1975), 

reprinted in 1975 U.S.C.C.A.N. 321, 338. 

14See Exchange Act Release No. 12251 (Mar. 24, 

1976), 41 FR 13678, 13679 (Mar. 31, 1976) (‘‘1976 

Release’’). 15See Special Study, H.R. Doc. No. 88–95, pt. 2, 

at 321. 16See 1995 Rule Proposal, 60 FR at 9750; Report 

of Investigation in the Matter of Investment 

Information, Inc. Relating to the Activities of 

Certain Investment Advisers, Banks, and BrokerDealers, Exchange Act Release No. 16679, 19 SEC 

Docket 926, 931 (Mar. 19, 1980) (‘‘III Report’’); 1976 

Release, 41 FR at 13679. 17Securities Acts Amendments of 1975: Hearings 

on S. 249 Before the Subcomm. on Securities of the 

Senate Comm. on Banking, Housing, and Urban 

Affairs, 94th Cong., 1st Sess. 329–31 (1975) (‘‘S. 249 

Hearings’’) (Combined statement of Baker, Weeks & 

Co., Inc., Donaldson, Lufkin & Jenrette Sec. Corp., 

Mitchell, Hutchins Inc., and Oppenheimer & Co.). 

18See Securities Acts Amendments of 1975, Pub. 

L. 94–29, 89 Stat. 97, 161–62 (1975). Section 28(e) 

[15 U.S.C. 78bb(e)] governs the conduct of all 

persons who exercise investment discretion with 

respect to an account, including investment 

advisers, mutual fund portfolio managers, 

fiduciaries of bank trust funds, and money 

managers of pension plans and hedge funds. The 

scope of Section 28(e) therefore extends to entities 

that are within the jurisdiction of the Board of 

Governors of the Federal Reserve, the Office of the 

Comptroller of the Currency, the Department of 

Labor, and the Office of Thrift Supervision. 

broker-dealers and investment advisers. 

The Commission also has brought 

enforcement actions involving client 

commission practices.6

In light of the Commission’s 

experience with Section 28(e) and in 

recognition of changing market 

conditions, the Commission is 

proposing to provide further guidance 

on money managers’ use of client assets 

to pay for research and brokerage 

services under Section 28(e) of the 

Exchange Act.7 This release would 

interpret the scope of the safe harbor as 

follows: 

• Eligibility of brokerage and research 

services for safe harbor protection is 

governed by the criteria in Section 

28(e)(3),8 consistent with the 

Commission’s 1986 ‘‘lawful and 

appropriate assistance’’ standard. 

• ‘‘Research services’’ are restricted to 

‘‘advice,’’ ‘‘analyses,’’ and ‘‘reports’’

within the meaning of Section 28(e)(3). 

• Physical items, such as computer 

hardware, which do not reflect the 

expression of reasoning or knowledge 

relating to the subject matter identified 

in the statute, are outside the safe 

harbor. 

• Market, financial, economic, and 

similar data would be eligible for the 

safe harbor. 

• ‘‘Brokerage services’’ within the 

safe harbor are those products and 

services that relate to the execution of 

the trade from the point at which the 

money manager communicates with the 

broker-dealer for the purpose of 

transmitting an order for execution, 

through the point at which funds or 

securities are delivered or credited to 

the advised account. 

• Mixed-use items must be 

reasonably allocated between eligible 

and ineligible uses, and the allocation 

must be documented so as to enable the 

money manager to make the required 

good faith determination of the 

reasonableness of commissions in 

relation to the value of brokerage and 

research services. 

This release reiterates the statutory 

requirement that money managers must 

make a good faith determination that 

commissions paid are reasonable in 

relation to the value of the products and 

services provided by broker-dealers in 

connection with the managers’

responsibilities to the advisory accounts 

for which the managers exercise 

investment discretion. 

Finally, the release reiterates that 

under Section 28(e), broker-dealers must 

be financially responsible for the 

brokerage and research products that 

they provide to money managers, and 

they must be involved in ‘‘effecting’’ the 

trade. 

II. ‘‘Brokerage and Research Services’’ 

Under Section 28(e) of the Exchange 

Act 

A. Origins of the Section 28(e) Safe 

Harbor 

In the early 1970s, the Commission 

studied whether to require unfixing 

commission rates on national 

exchanges, which had been fixed by 

custom and regulation since the 

founding of the New York Stock 

Exchange nearly two hundred years 

earlier.9 At the same time, the House 

and Senate began to consider whether to 

eliminate fixed commission rates 

legislatively.10 The Commission 

adopted Rule 19b–3 under the Exchange 

Act,11 which ended fixed commission 

rates on national securities exchanges 

effective May 1, 1975.12 Just one month 

later, Congress passed legislation 

unfixing commission rates as part of the 

Securities Acts Amendments of 1975 

(‘‘1975 Amendments’’).13

In the era of fixed rates, when brokerdealers could not compete on the basis 

of the commissions that they could 

charge for executing orders, they 

competed on the basis of services 

including non-execution services that 

they could offer.14 Indeed, brokerdealers had long been accustomed to 

attracting order execution business from 

institutional money managers by 

offering them brokerage functions and 

research reports to distinguish their 

services from those of their 

competitors.15 As the end of the fixedrate era drew near, however, money 

managers and broker-dealers alike 

questioned how competition over 

commission rates would disrupt these 

practices. Institutional money managers 

expressed concern that, in an 

environment of competitive commission 

rates, they would be forced to allocate 

brokerage solely on the basis of lowest 

execution costs, or that paying more 

than the lowest commission rate would 

be deemed a breach of fiduciary duty, 

and that useful research might become 

more difficult to obtain.16 Brokerdealers, which were accustomed to 

producing proprietary ‘‘Street’’ research, 

expressed concern that they could no 

longer be compensated in commissions 

for their work product if orders were 

routed to broker-dealers that provided 

execution-only service at lower rates.17

In an effort to address the industry’s 

uncertainties about competitive 

commission rates, Congress included a 

safe harbor in the 1975 Amendments, 

codified as Section 28(e) of the 

Exchange Act.18 The safe harbor 

provides generally that a money 

manager does not breach his fiduciary 

duties under state or federal law solely 

on the basis that the money manager has 

paid brokerage commissions to a brokerdealer for effecting securities 

transactions in excess of the amount 

61702 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

19See supra note 1. 

20The Commission has interpreted Section 28(e) 

as encompassing client commissions on agency 

transactions and fees on certain riskless principal 

transactions that are reported under NASD trade 

reporting rules. Exchange Act Release No. 45194 

(Dec. 27, 2001), 67 FR 6, 7 (Jan. 2, 2002) (‘‘2001 

Release’’). Managers may not use client funds to 

obtain brokerage and research services under the 

safe harbor in connection with fixed income trades 

that are not executed on an agency basis, principal 

trades (except for certain riskless principal trades), 

or other instruments traded net with no explicit 

commissions. 

Further, directed brokerage transactions (whether 

to recapture a portion of the commission for the 

client or to pay client expenses such as sub-transfer 

agent fees, consultants’ fees, or for administrative 

services) ‘‘clearly do not fall within the safe harbor 

of Section 28(e)’’ because ‘‘[t]he safe harbor is 

available only to persons who are exercising 

investment discretion.’’ 1986 Release, 51 FR at 

16011. ‘‘A pension plan sponsor that has retained 

a money manager to make investment decisions, as 

is the case in directed brokerage arrangements, is 

not exercising investment discretion.’’ Id. Similarly, 

a mutual fund that has retained a money manager 

to make investment decisions is not exercising 

investment discretion. Unlike client commission 

arrangements that raise conflict of interest concerns 

addressed by Section 28(e), directed brokerage 

arrangements do not raise these concerns because 

they typically involve use of a fund’s commission 

dollars to obtain services that directly and 

exclusively benefit the fund. See Payment for 

Investment Company Services with Brokerage 

Commissions, Securities Act Release No. 7197 (July 

21, 1995), 60 FR 38918 (July 28, 1995). The 

Commission has recently prohibited funds from 

using brokerage to pay for distribution. See 

Investment Company Act Release No. 26591 (Sept. 

2, 2004), 69 FR 54728 (Sept. 9, 2004). 

21 15 U.S.C. 80b–1. See 1986 Release, 51 FR at 

16008–09 (discussing the principal provisions of 

the Advisers Act and rules and forms thereunder 

that impose disclosure and other obligations on 

investment advisers and related persons). 

22 15 U.S.C. 80a–1. See 1986 Release, 51 FR at 

16009 (discussing the principal provisions of the 

Investment Company Act and rules and forms 

thereunder that impose disclosure and other 

obligations on investment advisers of registered 

investment companies and related persons). 

23Employee Retirement Income Security Act of 

1974, 29 U.S.C. 1001. See also Statement of Policies 

Concerning Soft Dollar and Directed Commission 

Arrangements, ERISA Technical Release No. 86–1, 

[1986–87 Decisions] Fed. Sec. L. Rep. ¶ 84,009 (May 

22, 1986). 

24Section 17(e)(1) of the Investment Company 

Act [15 U.S.C. 80a–17(e)(1)] generally makes it 

unlawful for any affiliated person of a registered 

investment company to receive any compensation 

for the purchase or sale of any property to or for 

the investment company when that person is acting 

as an agent for the company other than in the 

course of that person’s business as a broker-dealer. 

Essentially, Section 17(e)(1) may be violated if an 

affiliated person of a registered investment 

company, such as an adviser, receives 

compensation for the purchase or sale of property 

to or from the investment company. Absent the 

protection of Section 28(e), an investment adviser’s 

receipt of compensation under a client commission 

arrangement for the purchase or sale of any 

property, including securities, to or for the 

investment company may constitute a violation of 

Section 17(e)(1). See U.S. v. Deutsch, 451 F.2d 98, 

110–11 (2d Cir. 1971), cert. denied, 404 U.S. 1019 

(1972). If a client commission arrangement is not 

consistent with Section 28(e), disclosure of the 

arrangement would not cure any Section 17(e)(1) 

violation. See 1986 Release, 51 FR at 16010 n.55. 

25See 2001 Release; 1986 Release; 1976 Release; 

III Report. In addition, the Commission has charged 

money managers and broker-dealers with violations 

of the federal securities laws in circumstances in 

which they did not act within the safe harbor and 

defrauded investors. See, e.g., Portfolio Advisory 

Services, LLC, and Cedd L. Moses, Advisers Act 

Release No. 2038, 77 SEC Docket 2759–31 (June 20, 

2002); Dawson-Samberg Capital Management, Inc. 

and Judith A. Mack, Advisers Act Release No. 1889, 

54 SEC 786 (Aug. 3, 2000); Founders Asset 

Management LLC and Bjorn K. Borgen, Advisers Act 

Release No. 1879, 54 SEC 762 (June 15, 2000); 

Marvin & Palmer Associates, Inc., et al., Advisers 

Act Release No. 1841, 70 SEC Docket 1643 (Sept. 

30, 1999); Fleet Investment Advisors, Inc., Advisers 

Act Release No. 1821, 70 SEC Docket 1217 (Sept. 

9, 1999); Republic New York Sec. Corp. and James 

Edward Sweeney, Exchange Act Release No. 41036, 

53 SEC 1283 (Feb. 10, 1999); SEC v. Sweeney 

Capital Management, Inc., Litig. Release No. 15664, 

66 SEC Docket 1613 (Mar. 10, 1998), 1999 U.S. Dist. 

LEXIS 22298 (1999) (order granting permanent 

injunction and other relief); Renaissance Capital 

Advisers, Inc., Advisers Act Release No. 1688, 66 

SEC Docket 408 (Dec. 22, 1997); Oakwood 

Counselors, Inc., Advisers Act Release No. 1614, 63 

SEC Docket 2034 (Feb. 11, 1997); S Squared 

Technology Corp., Advisers Act Release No. 1575, 

62 SEC Docket 1446 (Aug. 7, 1996); SEC v. Galleon 

Capital Mgmt., Litig. Release No. 14315, 57 SEC 

Docket 2593 (Nov. 1, 1994). 

26 1976 Release, 41 FR at 13678. 

27 Id. 

28 Id. at 13679. 

29 Id. 

30 Id. 

another broker-dealer would have 

charged, if the money manager 

determines in good faith that the 

amount of the commissions paid is 

reasonable in relation to the value of the 

brokerage and research services 

provided by such broker-dealer. 

As fiduciaries, money managers are 

obligated to act in the best interest of 

their clients, and cannot use client 

assets (including client commissions) to 

benefit themselves, absent client 

consent.19 Money managers who obtain 

brokerage and research services with 

client commissions do not have to 

purchase those services with their own 

funds, which creates a conflict of 

interest for the money managers. 

Section 28(e) addresses these conflicts 

by permitting money managers to pay 

higher commissions on behalf of a client 

than otherwise are available to obtain 

brokerage and research services, if 

managers make their good faith 

determination regarding the 

reasonableness of commissions paid.20

Conduct not protected by Section 28(e) 

may constitute a breach of fiduciary 

duty as well as a violation of the federal 

securities laws, particularly the 

Investment Advisers Act of 1940 21 and 

the Investment Company Act of 1940 

(‘‘Investment Company Act’’),22 and the 

Employee Retirement Income Security 

Act of 1974 (‘‘ERISA’’).23 In particular, 

money managers of registered 

investment companies and pension 

funds subject to ERISA may violate 

Section 17(e)(1) of the Investment 

Company Act or ERISA, respectively, 

unless they satisfy the requirements of 

the Section 28(e) safe harbor.24

B. Previous Commission Guidance on 

the Scope of Section 28(e) 

The Commission has issued three 

interpretive releases under Section 28(e) 

and a report pursuant to Section 21(a) 

of the Exchange Act that addresses 

issues associated with Section 28(e).25

We discuss these below. 

1. 1976 Release 

In 1976, the Commission issued an 

interpretive release stating that the safe 

harbor did not protect ‘‘products and 

services which are readily and 

customarily available and offered to the 

general public on a commercial 

basis.’’ 26 The Commission identified 

these products and services as examples 

of excluded items: ‘‘newspapers, 

magazines and periodicals, directories, 

computer facilities and software, 

government publications, electronic 

calculators, quotation equipment, office 

equipment, airline tickets, office 

furniture and business supplies.’’ 27

In that release, the Commission also 

admonished money managers not to 

direct broker-dealers to make ‘‘give-up’’

payments, in which the money manager 

asked the broker-dealer, retained to 

effect a transaction for the account of a 

client, to ‘‘give up’’ part of the 

commission negotiated by the brokerdealer and the money manager to 

another broker-dealer designated by the 

money manager for whom the executing 

or clearing broker is not a normal and 

legitimate correspondent. The 

Commission stated that in order to be 

within the definition of ‘‘brokerage and 

research services’’ under Section 28(e), 

‘‘it was intended * * * that a research 

service paid for in commissions by 

accounts under management be 

provided by the particular broker which 

executed the transactions for those 

accounts.’’ 28 At the same time, the 

Commission acknowledged the value of 

third-party research by stating that, 

‘‘under appropriate circumstances, 

[Section 28(e) might] be applicable to 

situations where a broker provides a 

money manager with research produced 

by third parties.’’ 29 The Commission 

emphasized that the money manager 

‘‘should be prepared to demonstrate the 

required good faith determination in 

connection with the transaction.’’ 30

2. Report in the Matter of Investment 

Information, Inc. 

In 1980, the Commission issued a 

report pursuant to Section 21(a) of the 

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61703 

31See III Report, 19 SEC Docket at 926. 32Applying the 1976 standard, the Commission 

found that certain services received by some 

participating money managers were not research 

services because these services were readily and 

customarily available and offered to the general 

public on a commercial basis. These included such 

items as periodicals, newspapers, quotation 

equipment, and general computer services. See III 

Report, 19 SEC Docket at 931 n.17. 33 Id. at 931–32. 

34 Id. at 932. 

35 1986 Release, 51 FR at 16005. 

36 Id. at 16005–06. 

37 Id. at 16006. 

38 Id. at 16007. 

39 Id. at 16006. 

40 Id. 

41 Id. 

42 Id. at 16007. 

43See 2001 Release, 67 FR at 6; 1995 Rule 

Proposal, 60 FR at 9751 n.10; Investment Company 

Act Release No. 20472 (Aug. 11, 1994), 59 FR 

42187, 42188 n.3 (Aug. 17, 1994). 

44 2001 Release, 67 FR at 7. 

Exchange Act following an investigation 

of Investment Information, Inc.’’s (‘‘III’’) 

client commission arrangements (‘‘III 

Report’’).31 III managed the client 

commission programs of money 

managers. Typically, under these 

arrangements, the money manager 

directed brokerage transactions to 

broker-dealers that III designated. The 

broker-dealers, who provided execution 

services only, retained half of each 

commission and remitted the balance to 

III. III retained a fee (for ‘‘services’’ that 

III provided to money managers, 

ostensibly for managing the client 

commission accounts) and credited a 

portion of its commission to the money 

manager’s account. The money manager 

could either recapture the credited 

amount (i.e., receive cash) for the 

benefit of his client or use the credit to 

purchase research services.32 The 

money managers made the arrangements 

for acquiring the research services 

directly with the service vendors, and III 

simply paid the bills for the services as 

the money managers requested. The 

executing broker-dealers were unaware 

of the specific services the money 

managers acquired from the vendors. III 

was not a registered broker-dealer, and 

it did not perform any kind of brokerage 

function in the securities transactions. 

The Commission found that these 

arrangements did not fall within Section 

28(e) of the Exchange Act because the 

broker-dealers that were ‘‘effecting’’ the 

transactions ‘‘in no significant sense 

provided the money managers with 

research services.’’ 33 They only 

executed the transactions and paid a 

portion of the commissions to III. The 

broker-dealers were not aware of the 

specific services that the managers 

acquired and did not pay the bills for 

these services. The Commission 

concluded that, although Section 28(e) 

does not require a broker-dealer to 

produce research services ‘‘in-house,’’

the services must nevertheless be 

‘‘provided by’’ the broker-dealers. The 

Commission found that a broker-dealer 

is not providing research services when 

it pays obligations the money manager 

owes to a third party. The Commission 

indicated that, consistent with Section 

28(e), broker-dealers could arrange to 

have the third-party research provided 

directly to the money manager, with the 

payment obligation falling on the 

broker-dealer.34

3. 1986 Release 

Following a staff examination of 

client commission practices in 1984–

1985, the Commission concluded that 

the 1976 standard was ‘‘difficult to 

apply and unduly restrictive in some 

circumstances,’’ particularly as the 

types of research products and their 

method of delivery had proliferated and 

become more complex.35 The 

Commission expressed concern that 

‘‘uncertainty about the standard may 

have impeded money managers from 

obtaining, for commission dollars, goods 

and services’’ that they believed were 

important to making investment 

decisions.36

The Commission withdrew the 1976 

standard and construed the safe harbor 

to be available to research services that 

satisfy the statute’s definition of 

‘‘brokerage and research services’’ in 

Section 28(e)(3) and provide ‘‘lawful 

and appropriate assistance to the money 

manager in the performance of his 

investment decision-making 

responsibilities.’’ 37 We concluded that a 

product or service that was readily and 

customarily available and offered to the 

general public on a commercial basis 

nevertheless could constitute research. 

The 1986 Release also re-affirmed that, 

under appropriate circumstances, 

money managers may use client 

commissions to obtain third-party 

research (i.e., research produced by 

someone other than the executing 

broker-dealer).38 The 1986 Release also 

emphasized the importance of written 

disclosure of client commission 

arrangements to clients and reiterated a 

money manager’s duty to seek best 

execution. 

The 1986 Release also introduced the 

concept of ‘‘mixed use.’’ In many cases, 

a product or service obtained using 

client commissions may serve functions 

that are not related to the investment 

decision-making process, such as 

accounting or marketing. Management 

information services, which may 

integrate trading, execution, accounting, 

recordkeeping, and other administrative 

matters such as measuring the 

performance of accounts, were noted as 

an example of a product that may have 

a mixed use. The Commission indicated 

that where a product has a mixed use, 

an investment manager should make a 

reasonable allocation of the cost of the 

product according to its use, and should 

keep adequate books and records 

concerning the allocations.39 The 

Commission also noted that the 

allocation decision itself poses a conflict 

of interest for the money manager that 

should be disclosed to the client. In the 

1986 Release, the Commission stated 

that a money manager may use client 

commissions pursuant to Section 28(e) 

to pay for the portion of a service or 

specific component that assists him in 

the investment decision-making 

process, but he cannot use client 

commissions to pay for that portion of 

a service that provides him 

administrative assistance.40

The 1986 Release also addressed 

third-party research. Citing to the III 

Report, the Commission reaffirmed its 

view that, ‘‘while a broker may under 

appropriate circumstances arrange to 

have research materials or services 

produced by a third party, it is not 

‘providing’ such research services when 

it pays obligations incurred by the 

money manager to the third party.’’ 41 In 

the III Report, the Commission found 

that the money managers and the 

research vendors, rather than the brokerdealers, had made all of the 

arrangements for acquiring the 

services.42

4. 2001 Release 

Until 2001, the Commission 

interpreted Section 28(e) to be available 

only for research and brokerage services 

obtained in relation to commissions 

paid to a broker-dealer acting in an 

‘‘agency’’ capacity.43 That interpretation 

meant that money managers could not 

rely on the safe harbor for research and 

brokerage services obtained in relation 

to fees charged by market makers when 

they executed transactions in a 

‘‘principal’’ capacity. The Commission 

interpreted the term ‘‘commission’’ in 

Section 28(e) in this fashion because, in 

the Commission’s view, fees on 

principal transactions were not 

quantifiable and fully disclosed in a 

way that would permit a money 

manager to determine that the fees were 

reasonable in relation to the value of 

research and brokerage services 

received.44

In 2001, the Nasdaq Stock Market 

asked the Commission to reconsider this 

interpretation of Section 28(e) to apply 

61704 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

45See Letter from Hardwick Simmons, Chief 

Executive Officer, The Nasdaq Stock Market, Inc. to 

Harvey L. Pitt, Chairman, U.S. Securities and 

Exchange Commission (Sept. 7, 2001) (on file with 

the Commission). 

46 2001 Release, 67 FR at 7. 

47See Office of Compliance Inspections and 

Examination, U.S. Securities and Exchange 

Commission, Inspection Report on the Soft Dollar 

Practices of Broker-Dealers, Investment Advisers 

and Mutual Funds 3 (Sept. 22, 1998) (‘‘1998 OCIE 

Report’’), available at http://www.sec.gov/news/ 

studies/softdolr.htm. 

48 1998 OCIE Report, at 4–5. 

49 Id. at 47–52. 

50See NASD, Report of the Mutual Fund Task 

Force, ‘‘Soft Dollars and Portfolio Transaction 

Costs’’ (Nov. 11, 2004) (‘‘NASD Task Force 

Report’’), available at http://www.nasd.com/web/ 

groups/rules_regs/documents/rules_regs/ 

nasdw_012356.pdf. 

51NASD Task Force Report, at 5. 

52NASD Task Force Report, at 6–7. The Task 

Force proposed that ‘‘intellectual content’’ be 

defined as ‘‘any investment formula, idea, analysis 

or strategy that is communicated in writing, orally 

or electronically and that has been developed, 

authored, provided or applied by the broker-dealer 

or third-party research provider (other than 

magazines, periodicals or other publications in 

general circulation).’’ Id. at 7. 

53Specifically, the NASD Task Force indicated 

that its proposed definition of research services 

would exclude the following: computer hardware 

and software, unrelated to any research content or 

analytical tool; phone lines and data transmission 

lines; terminals and similar facilities; 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. NASD Task Force 

Report, at 7. 

54Regarding disclosure, the NASD Task Force 

Report recommended, among other things: (a) 

Ensuring that fund boards obtain information about 

a fund adviser’s brokerage allocation practices and 

client commission services received; (b) mandating 

enhanced disclosure in fund prospectuses to 

improve investor awareness; (c) applying disclosure 

requirements to all types of commissions; and (d) 

enhancing disclosure to investors about portfolio 

transaction costs. NASD Task Force Report, at 4. 

See infra note 7. 

55U.K. Financial Services Authority, Policy 

Statement 05/9, Bundled Brokerage and Soft 

Commission Arrangements: Feedback on CP 05/5 

and Final Rules (July 2005) (‘‘FSA Final Rules’’), 

available at http://www.fsa.gov.uk/pages/library/ 

policy/policy/2005/05_09.shtml. The rules apply 

only to equity trades and not to fixed income trades. 

FSA Final Rules, at Annex, p. 6 (Conduct of 

Business Sourcebook Rule 7.18.1). The FSA 

proposed the rules in March 2005. See Consultation 

Paper 05/5, Bundled Brokerage and Soft 

Commission Arrangements: Proposed Rules (Mar. 

2005) (‘‘FSA Rule Proposal’’), available at http:// 

www.fsa.gov.uk/pubs/cp/cp05_05.pdf. 

56See FSA Final Rules, at Annex, pp. 8–9 

(Conduct of Business Sourcebook Rules 7.18.4 to 

7.18.8). See also FSA Rule Proposal, at 63–64. 

57FSA Final Rules, at 5. The rules also set forth 

the principle that investment managers should 

inform advisory clients how their commissions are 

being spent, and indicate that, in evaluating 

compliance with this principle, the FSA will have 

regard for the extent to which investment managers 

adopt the disclosure standards developed by 

industry associations such as the U.K. Investment 

Management Association (‘‘IMA’’). See FSA Final 

Rules, at Annex, p. 11 (Conduct of Business 

Sourcebook Rule 7.18.14). See also Investment 

Management Association, Pension Fund Disclosure 

Code, Second Edition (Mar. 2005), available at 

http://www.investmentuk.org/news/standards/ 

pfdc2.pdf. 

58FSA Final Rules, at 5. Firms may continue to 

comply with existing rules until the earlier of the 

expiration of existing agreements or June 30, 2006. 

also to research and brokerage services 

obtained in relation to fully and 

separately disclosed fees on certain 

riskless principal transactions effected 

by National Association of Securities 

Dealers, Inc. (‘‘NASD’’) members and 

reported under NASD trade reporting 

rules.45 Based on required disclosure of 

fees under confirmation rules and 

reporting of the trade under NASD 

rules, the Commission determined that 

the money manager could make the 

necessary determination of the 

reasonableness of these charges under 

Section 28(e). The Commission 

therefore modified its interpretation of 

‘‘commission’’ for purposes of the 

Section 28(e) safe harbor to encompass 

fees paid for riskless principal 

transactions in which both legs are 

executed at the same price and the 

transactions are reported under the 

NASD’s trade reporting rules.46

C. 1998 Office of Compliance 

Inspections and Examinations (‘‘OCIE’’) 

Report 

In 1998, after OCIE conducted 

examinations of approximately 355 

broker-dealers, advisers, and funds, the 

Commission published the staff’s report, 

which described the range of products 

and services that advisers obtain under 

their client commission arrangements.47

The report raised concerns about the 

nature of products and services that 

were being treated as ‘‘research,’’ the 

purchase of ‘‘mixed-use’’ items, 

disclosure by advisers about their client 

commission arrangements, and 

recordkeeping.48 The 1998 OCIE Report 

made several recommendations for 

improving commission practices, 

including that the Commission provide 

further guidance on the scope of the safe 

harbor and require better recordkeeping 

and enhanced disclosure of client 

commission arrangements and 

transactions.49

D. Report of the NASD’s Mutual Fund 

Task Force 

In 2004, the NASD Mutual Fund Task 

Force, composed of senior executives 

from mutual fund management 

companies and broker-dealers, as well 

as representatives from the academic 

and legal communities, published 

observations and recommendations to 

the Commission concerning client 

commission practices and portfolio 

transaction costs.50 In particular, the 

NASD Task Force Report recommended 

that the Section 28(e) safe harbor be 

retained, but that the interpretation of 

the scope of research services be 

narrowed to better tailor it to the types 

of client commission services that 

principally benefit the adviser’s clients 

rather than the adviser.51 The NASD 

Task Force Report recommended that 

the Commission interpret the safe 

harbor to protect only brokerage services 

as described in Section 28(e)(3) and the 

‘‘intellectual content’’ of research, but 

not the means by which such content is 

provided.52 The NASD Task Force 

Report suggested that this approach 

would exclude magazines, newspapers, 

and other such publications that are in 

general circulation to the retail public, 

and such items as computer hardware, 

phone lines, and data transmission 

lines.53 The NASD Task Force Report 

emphasized that the safe harbor should 

encompass third-party research and 

proprietary research on equal terms, and 

recommended improved disclosure.54

E. United Kingdom Financial Services 

Authority (‘‘FSA’’) 

On July 22, 2005, the FSA adopted 

final client commission rules in 

conjunction with issuing policy 

statement PS 05/9.55 The final rules 

describe ‘‘execution’’ and ‘‘research’’

services and products eligible to be paid 

for by commissions, and specify a 

number of ‘‘non-permitted’’ services 

that must be paid for in hard dollars, 

such as custody not incidental to 

execution, computer hardware, 

telephone lines, and portfolio 

performance measurement and 

valuation services.56 The policy 

statement also acknowledges that some 

products and services may be permitted 

or non-permitted depending on how 

they are used by the money manager.57

The rules will become effective 

beginning in January 2006, with a 

transitional period until June 2006.58

With the globalization of the world’s 

financial markets, many U.S. market 

participants have a significant presence 

abroad, and in particular in the U.K. To 

the extent that the Commission’s 

approach to client commissions is 

compatible with that taken in the U.K., 

market participants’ costs of compliance 

with multiple regulatory regimes would 

be reduced. Therefore, we have taken 

the FSA’s work into account in 

developing our position in this release, 

while recognizing the significant 

differences in our governing law and 

rules, such as the fact that the U.K. does 

not have a statutory provision similar to 

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61705 

59We have also taken note of the views of other 

regulators. See Ontario Securities Commission, 

Concept Paper 23–402, Best Execution and Soft 

Dollar Arrangements (Feb. 8, 2005), available at 

http://www.osc.gov.on.ca/Regulation/Rulemaking/ 

Current/Part2/cp_20050204_23–402_ 

bestexecution.jsp; Australian Securities and 

Investments Commission, Press Release 04–181, 

Soft Dollar Benefits Need Clear Disclosure (June 10, 

2004), available at http://www.asic.gov.au/asic/

ASIC_PUB.NSF/byid/77D7FCEFB7653EC5CA

256EAF0002F6C2?opendocument. 

60The FSA has determined that market data that 

has not been analyzed or manipulated does not 

meet the requirements of a research service, but 

permits managers to justify using client 

commissions to pay for raw data feeds as execution 

services. The FSA also has identified seminars as 

‘‘non-permitted’’ services. FSA Final Rules, at 2.15 

and Annex, p. 9 (Conduct of Business Sourcebook 

Rules 7.18.7 and 7.18.8(d)). 

61Our proposed interpretation would not replace 

other sections of the 1986 Release. 

62See Senate Comm. on Banking, Housing and 

Urban Affairs, Securities Acts Amendments of 

1975, S. Rep. No. 94–75, at 71 (1975), reprinted in 

1975 U.S.C.C.A.N. 179, 249. See also supra note 76. 

63 1998 OCIE Report, at 31. 

64 Id. at 22, 31. 

65 Id. at 31. 

66 Id. at 31–32. 

67 Id. at 34–35. 

68 Id. at 49. 

69See id. at 3–4, 31–32. 

70See id. at 4–6, 32–33. 

71See, e.g., Mutual Funds Integrity and Fee 

Transparency Act of 2003, H.R. 2420, 108th Cong. 

(2003) (This bill would have required, among other 

things, that the Commission do the following: issue 

rules requiring mutual funds to disclose their 

policies and practices regarding the use of client 

commissions to obtain research, advice, or 

brokerage activities; issue rules requiring managers 

to maintain copies of the written contracts with 

third-party research providers; and conduct a study 

on the use of client commission arrangements by 

managers.); Mutual Fund Transparency Act of 2003, 

S. 1822, 108th Cong. (2003) (This bill would have 

required, among other things, that the Commission 

Continued 

Section 28(e).59 This proposed 

interpretive guidance is generally 

consistent with the FSA’s rules, with a 

few exceptions.60

III. Commission’s Interpretive 

Guidance 

In light of recent developments in 

client commission practices, evolving 

technologies, marketplace 

developments, and the observations of 

the staff in examinations of industry 

participants, we have revisited our 

previous guidance as to the meaning of 

the phrase ‘‘brokerage and research 

services’’ in Section 28(e). After careful 

consideration, we are proposing a 

revised interpretation that would 

replace Sections II and III of the 1986 

Release.61 Specifically, we are providing 

guidance with respect to: (i) The 

appropriate framework for analyzing 

whether a particular service falls within 

the ‘‘brokerage and research services’’

safe harbor; (ii) the eligibility criteria for 

‘‘research’’; (iii) the eligibility criteria 

for ‘‘brokerage’’; and (iv) the appropriate 

treatment of ‘‘mixed-use’’ items. We also 

discuss the money manager’s statutory 

requirement to make a good faith 

determination that the commissions 

paid are reasonable in relation to the 

value of the brokerage and research 

services received. Finally, we provide 

guidance on third-party research and 

commission-sharing arrangements. 

Section 28(e) applies equally to 

arrangements involving client 

commissions paid to full service brokerdealers that provide brokerage and 

research services directly to money 

managers, and to third-party research 

arrangements where the research 

services and products are developed by 

third parties and provided by a brokerdealer that participates in effecting the 

transaction. Today, it remains true that, 

if the conditions of the safe harbor of 

Section 28(e) are met, a money manager 

does not breach his fiduciary duties 

solely on the basis that he uses client 

commissions to pay a broker-dealer 

more than the lowest available 

commission rate for a bundle of 

products and services provided by the 

broker-dealer (i.e., anything more than 

‘‘pure execution’’). 

A. Present Environment 

In the 1986 Release, the Commission 

incorporated from the legislative history 

the phrase ‘‘lawful and appropriate 

assistance’’ to the money manager in 

carrying out his investment decisionmaking responsibilities in developing 

the Commission standard governing the 

range of brokerage and research 

products and services that may be 

obtained by a money manager within 

the safe harbor.62 Since that time, some 

have construed this standard broadly to 

apply to services and products that are 

only remotely connected to the 

investment decision-making process. In 

some cases, ‘‘administrative’’ or 

‘‘overhead’’ goods and services have 

been classified as research.63 In the 1998 

OCIE Report, examiners reported that 

28% of the money managers and 35% 

of the broker-dealers that were 

examined had entered into at least one 

client commission arrangement that, in 

the staff’s view, was outside of the scope 

of Section 28(e) and the 1986 Release.64

In particular, OCIE examiners identified 

numerous examples of advisers that it 

believed failed to separate overhead or 

administrative expenses from those 

items that provide benefits to clients as 

brokerage and research services.65

Examples of non-research items 

included: certified financial analyst 

(CFA) exam review courses, 

membership dues and professional 

licensing fees, office rent, utilities, 

phone, carpeting, marketing, 

entertainment, meals, copiers, office 

supplies, fax machines, couriers, backup 

generators, electronic proxy voting 

services, salaries, and legal and travel 

expenses.66

Client commissions are also used 

extensively to pay for mechanisms 

related to the delivery of research or 

brokerage services. In the 1998 OCIE 

Report, staff reported that some advisers 

used client commissions to pay for 

various peripheral items that support 

hardware and software, such as the 

power needed to run the computer and 

the dedicated telephone line used to 

receive information into the computer.67

The products and services available to 

money managers have grown more 

varied and complex. For example, a 

single software product may perform an 

array of functions, but only some of the 

functions are properly ‘‘brokerage and 

research services’’ under Section 28(e). 

In the 1998 OCIE Report, staff reported 

that ‘‘the types of products available for 

purchase with client commissions have 

greatly expanded since 1986,’’ leaving 

industry participants to grapple with 

decisions as to whether these products 

are ‘‘research’’ or ‘‘brokerage’’ within 

the safe harbor, or whether these 

products should be considered part of 

money managers’ overhead expenses to 

be paid for by managers with their own 

funds.68

The Commission observes that 

developments in technology have led to 

difficulties in applying client 

commission standards that were 

developed over the past thirty years. In 

addition, OCIE staff reported that money 

managers have taken an overbroad view 

of the products and services that qualify 

as ‘‘brokerage and research services’’

under the safe harbor.69 The complexity 

of products and services creates 

uncertainty about whether client 

commissions may be used within the 

safe harbor to purchase all or a portion 

of particular products and services. This 

uncertainty may result in the use of 

client commission dollars to acquire 

products and services that are outside of 

the safe harbor, improper allocation of 

research and non-research mixed-use 

products and services (as contemplated 

by the 1986 Release), or inadequate 

documentation of allocations.70

Questions regarding the use of client 

commissions have led legislators, 

regulators, fund industry participants, 

and investors to consider whether some 

uses of client commissions should be 

banned, the safe harbor withdrawn, or 

changes made to the regulatory 

landscape.71 As a first step to address 

61706 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

issue a rule to require mutual funds to disclose as 

fund fees and expenses brokerage commissions paid 

by the fund and borne by shareholders.). See also 

Letter from Matthew P. Fink, President, The 

Investment Company Institute, to William H. 

Donaldson, Chairman, U.S. Securities and Exchange 

Commission (Dec. 16, 2003) (urging the 

Commission to issue interpretative guidance 

excluding from the Section 28(e) safe harbor: (1) 

Computer hardware and software and other 

electronic communications facilities used in 

connection with trading investment decisionmaking; (2) publications, including books, 

newspapers, and electronic publications, that are 

available to the general public; and (3) third-party 

research services), available at http://www.sec.gov/ 

rules/petitions/petn4–492.htm. 

72 In addition to concerns over the scope of the 

safe harbor under current market conditions, the 

Commission recognizes that improvements may be 

necessary in disclosure and documentation of client 

commission practices. For example, the ability to 

enforce client commission standards may be 

hampered by inadequate documentation. The 

Commission will evaluate whether further action is 

necessary. 

73See Form ADV, Pt. II, Items 12.B and 13.A. See 

also Sage Advisory Services LLC, Exchange Act 

Release No. 44600, 75 SEC Docket 1073 (July 27, 

2001). 

74Senate Comm. on Banking, Housing and Urban 

Affairs, Securities Acts Amendments of 1975, S. 

Rep. No. 94–75, at 71 (1975), reprinted in 1975 

U.S.C.C.A.N. 179, 249. 

75 III Report, 19 SEC Docket at 931. 

76See 1986 Release, 51 FR at 16006 n.9 (quoting 

from Senate Comm. on Banking, Housing and 

Urban Affairs, Securities Acts Amendments of 

1975, S. Rep. No. 94–75, at 71 (1975), reprinted in 

1975 U.S.C.C.A.N. 179, 249) (The Report concludes, 

‘‘Thus, the touchstone for determining when a 

service is within or without the definition in 

Section 28(e)(3) is whether it provides lawful and 

appropriate assistance to the money manager in the 

carrying out of his responsibilities.’’). In articulating 

the ‘‘commercial availability’’ standard for safeharbor eligibility in the 1976 Release, the 

Commission also expressly recognized ‘‘lawful and 

appropriate assistance’’ as the ‘‘touchstone’’ for 

whether a service is within or without the provision 

of Section 28(e)(3). 1976 Release, 41 FR at 13679. 

77See 1986 Release, 51 FR at 16006. See also 

1976 Release, 41 FR at 13679 (‘‘The term ‘brokerage 

and research services’, as used in Section 28(e), is 

defined in Section 28(e)(3).’’). Section 28(e)(3) states 

that, a person provides brokerage and research 

services insofar as he—

(A) furnishes advice, either directly or through 

publications or writings, as to the value of 

securities, the advisability of investing in, 

purchasing, or selling securities, and the 

availability of securities or purchasers or sellers of 

securities; 

(B) furnishes analyses and reports concerning 

issuers, industries, securities, economic factors and 

trends, portfolio strategy, and the performance of 

accounts; or 

(C) effects securities transactions and performs 

functions incidental thereto (such as clearance, 

settlement, and custody) or required in connection 

therewith by rules of the Commission or a selfregulatory organization of which such person is a 

member or person associated with a member or in 

which such person is a participant. 15 U.S.C. 

78bb(3)(A)–(C). 

78 15 U.S.C.78bb(e). See 1986 Release, 51 FR at 

16006–07. The Commission also emphasized the 

money manager’s disclosure and other obligations 

under the federal securities laws, including the 

duty to seek best execution of his or her client’s 

transactions. Id. at 16007–11. 

79 15 U.S.C. 78bb(e)(3)(A)–(B) (emphasis added). 

80See Senate Comm. on Banking, Housing and 

Urban Affairs, Securities Acts Amendments of 

1975, S. Rep. No. 94–75, at 71 (1975), reprinted in 

1975 U.S.C.C.A.N. 179, 249 (‘‘[T]he reference [in 

Section 28(e)] to economic factors and trends would 

subsume political factors which may have 

economic implications which may in turn have 

implications in terms of the securities markets as 

a whole or in terms of the past, present, or future 

values of individual securities or groups of 

securities.’’). See also S. 249 Hearings, at 329, 330 

(Combined statement of Baker, Weeks & Co., Inc., 

Donaldson, Lufkin & Jenrette Sec. Corp., Mitchell, 

the present environment, the 

Commission has determined to provide 

further guidance on the scope of the safe 

harbor.72 Further guidance in this area 

may be particularly important because, 

under existing law and rules, money 

managers must disclose client 

commission arrangements as material 

information,73 and may provide more 

detailed disclosure when they receive 

products or services that fall outside the 

scope of the safe harbor. If a money 

manager incorrectly concludes that a 

product or service is within the safe 

harbor, the money manager may provide 

disclosure that is inadequate. In 

addition, guidance will assist money 

managers of registered investment 

companies and pension funds subject to 

ERISA in determining whether they are 

complying with the Investment 

Company Act and ERISA, respectively, 

because using client commissions to pay 

for products that are outside the safe 

harbor may violate these laws. 

B. Framework for Analyzing the Scope 

of the ‘‘Brokerage and Research 

Services’’ Under Section 28(e) 

The Commission has recognized the 

need to interpret the scope of the terms 

‘‘brokerage and research services’’ in 

Section 28(e) in light of Congress’s 

intention to provide a limited safe 

harbor for conduct that otherwise may 

be a breach of fiduciary duty. The 

Senate Committee Report on the 1975 

Amendments regarding Section 28(e) 

states: ‘‘The definition of brokerage and 

research services is intended to 

comprehend the subject matter in the 

broadest terms, subject always to the 

good faith standard in Subsection 

(e)(1).’’ 74 However, as previously noted 

by the Commission, ‘‘Since Section 

28(e) involves a statutory exemption for 

conduct which might otherwise 

constitute a breach of fiduciary duty 

owed by a money manager to his client, 

the Commission believes that the 

section should be construed in light of 

its limited purposes.’’ 75

In the 1986 Release, the Commission 

adopted the ‘‘lawful and appropriate 

assistance’’ standard for ‘‘brokerage and 

research services,’’ 76 which was 

intended to supplement the statutory 

elements of the analysis of whether a 

money manager’s payment for a product 

or service with client commissions is 

within the safe harbor. While the 1986 

Release focused on the application of 

the ‘‘lawful and appropriate assistance’’

standard to research, we believe the 

standard also applies to brokerage 

services. 

Taking into account the legislative 

history of Section 28(e) and our prior 

guidance, the analysis of whether a 

particular product or service falls within 

the safe harbor should involve three 

steps. First, the money manager must 

determine whether the product or 

service falls within the specific statutory 

limits of Section 28(e)(3)(A), (B), or (C) 

(i.e., whether it is an eligible product or 

service under the safe harbor).77 Second, 

the manager must determine whether 

the eligible product or service actually 

provides lawful and appropriate 

assistance in the performance of his 

investment decision-making 

responsibilities. Finally, the manager 

must make a good faith determination 

that the amount of client commissions 

paid is reasonable in light of the value 

of products or services provided by the 

broker-dealer.78 We discuss these 

statutory elements in more detail below. 

C. Eligibility Criteria for ‘‘Research 

Services’’ Under Section 28(e)(3); Lawful 

and Appropriate Assistance 

The eligibility criteria that govern 

‘‘research services’’ are set forth in 

Section 28(e)(3) of the Exchange Act: 

For purposes of the safe harbor, a 

person provides * * * research services 

insofar as he—

(A) furnishes advice, either directly or 

through publications or writings, as to 

the value of securities, the advisability 

of investing in, purchasing, or selling 

securities, and the availability of 

securities or purchasers or sellers of 

securities; 

(B) furnishes analyses and reports 

concerning issuers, industries, 

securities, economic factors and trends, 

portfolio strategy, and the performance 

of accounts; * * * 79

In determining that a particular 

product or service falls within the safe 

harbor, the money manager must 

conclude that it constitutes ‘‘advice,’’

‘‘analyses,’’ or ‘‘reports’’ within the 

meaning of the statute and that its 

subject matter falls within the categories 

specified in Section 28(e)(3)(A) and (B). 

With respect to the subject matter of 

potential ‘‘research services,’’ we note 

that the categories expressly listed in 

Section 28(e)(3)(A) and (B) also 

‘‘subsume’’ other topics related to 

securities and the financial markets.80

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61707 

Hutchins Inc., and Oppenheimer & Co.) (Research 

under Section 28(e) should include ‘‘advice and 

information on industries, economics, world 

conditions, portfolio strategy and other areas.’’). 81The content may be original research or a 

synthesis, analysis, or compilation of the research 

of others. 82See Senate Comm. on Banking, Housing and 

Urban Affairs, Securities Acts Amendments of 

1975, S. Rep. No. 94–75, at 71 (1975), reprinted in 

1975 U.S.C.C.A.N. 179, 249 (‘‘computer analyses of 

securities portfolios would * * * be covered’’). 83See 1986 Release, 51 FR at 16007. We note that 

the FSA has identified seminars as ‘‘non-permitted’’

services. See FSA Final Rules, at Annex, p. 9 

(Conduct of Business Sourcebook Rule 7.18.8(d)). 

84See 1986 Release, 51 FR at 16006–07. 

85According to the 1998 OCIE Report, advisers 

used client commissions to pay for many of these 

items. See notes 65–67 and accompanying text. See 

also Sage Advisory Services LLC, Exchange Act 

Release No. 44600, 75 SEC Docket 1073 (July 27, 

2001) (adviser improperly used client commission 

credits to pay for undisclosed non-research 

business expenses such as legal, accounting, and 

back-office record keeping services, payments of 

self-regulatory organization (‘‘SRO’’) fees, and rent). 

86 In 1986, the Commission suggested that 

advisers could use client commissions to pay for 

the portion of the cost of computers that relate to 

receiving research. See 1986 Release, 51 FR at 

16006–07. In light of developments in technology 

and broad application of the 1986 standard to 

products and services that are only remotely 

connected to investment decision-making, as 

discussed above, we now believe that it is 

important to clarify that computers fall outside the 

scope of the safe harbor. 

87 1986 Release, 51 FR at 16006. We believe that, 

in the 1986 Release, the Commission’s indication 

that quotation equipment may be eligible under the 

safe harbor was intended to address market data. 

88 15 U.S.C. 78bb(e)(3)(B). 

89We note that the FSA has determined that, 

‘‘Examples of goods or services that relate to the 

provision of research that the FSA do not regard as 

meeting the requirements of [a research service] 

include price feeds or historical price data that have 

not been analyzed or manipulated to reach 

meaningful conclusions.’’ FSA Final Rules, at 

Annex p. 9 (Conduct of Business Sourcebook Rule 

7.18.7). 

90See 1998 OCIE Report, at 20. 

Thus, for example, a report concerning 

political factors that are interrelated 

with economic factors could fall within 

the scope of the safe harbor. The form 

(e.g., electronic or paper) of the research 

is irrelevant to the analysis of eligibility 

under the safe harbor. 

In evaluating the statutory language, 

the Commission notes that an important 

common element among ‘‘advice,’’

‘‘analyses,’’ and ‘‘reports’’ is that each 

reflects substantive content—that is, the 

expression of reasoning or knowledge.81

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)(3)(A) or (B). Traditional research 

reports analyzing the performance of a 

particular company or stock clearly 

would be eligible under Section 28(e). 

Certain financial newsletters and trade 

journals also could be eligible research 

services if they relate to the subject 

matter of the statute. Quantitative 

analytical software and software that 

provides analyses of securities 

portfolios would be eligible under the 

safe harbor if they reflect the expression 

of reasoning or knowledge relating to 

subject matter that is included in 

Section 28(e)(3)(A) and (B).82 Seminars 

or conferences where the content 

satisfies the above criteria also would be 

eligible.83

In contrast, products or services that 

do not reflect the expression of 

reasoning or knowledge, including 

products with inherently tangible or 

physical attributes (such as telephone 

lines or office furniture), are not eligible 

as research under the safe harbor. We do 

not believe that these types of products 

and services could be said to constitute 

‘‘advice,’’ ‘‘analyses,’’ or ‘‘reports’’

within the meaning of the statute. 

Applying this guidance, a money 

manager’s operational overhead 

expenses would not constitute eligible 

‘‘research services.’’ 84 For example, 

travel expenses, entertainment, and 

meals associated with attending 

seminars would not be eligible under 

the safe harbor. Similarly, office 

equipment, office furniture and business 

supplies, telephone lines, salaries 

(including research staff), rent, 

accounting fees and software, website 

design, e-mail software, internet service, 

legal expenses, personnel management, 

marketing, utilities, membership dues, 

professional licensing fees, and software 

to assist with administrative functions 

such as managing back-office functions, 

operating systems, and word processing 

are examples of other overhead items 

that do not meet the statutory criteria for 

research (or brokerage) set forth in this 

release and are not eligible under the 

safe harbor.85

Computer hardware and computer 

accessories, while they may assist in the 

delivery of research, would not be 

eligible ‘‘research services’’ because 

they do not reflect substantive content 

related in any way to making decisions 

about investing.86 Similarly, the 

peripherals and delivery mechanisms 

associated with computer hardware, 

including telecommunications lines, 

transatlantic cables, and computer 

cables, are outside the ‘‘research 

services’’ safe harbor. 

As noted above, even if the manager 

properly concludes that a particular 

product or service is an ‘‘analysis,’’

‘‘advice,’’ or ‘‘report’’ that reflects the 

expression of reasoning or knowledge, it 

would be eligible research only if the 

subject matter of the product or service 

falls within the categories specified in 

Section 28(e)(3)(A) and (B). Thus, for 

example, consultants’ services may be 

eligible for the safe harbor if the 

consultant provides advice with respect 

to portfolio strategy, but such services 

would not be eligible if the advice 

relates to the managers’ internal 

management or operations. 

With respect to data services—such as 

those that provide market data or 

economic data—we believe that such 

services could fall within the scope of 

the safe harbor as eligible ‘‘reports’’

provided that they satisfy the subject 

matter criteria. In the 1986 Release, we 

included market data services within 

the safe harbor, finding that they serve 

‘‘a legitimate research function of 

pricing securities for investment and 

keeping a manager informed of market 

developments.’’ 87 Because market data 

contain aggregations of information on a 

current basis related to the subject 

matter identified in the statute, and in 

light of the history of Section 28(e), our 

interpretation would conclude that 

market data, such as stock quotes, last 

sale prices, and trading volumes, 

contain substantive content and 

constitute ‘‘reports concerning * * * 

securities’’ within the meaning of 

Section 28(e)(3)(B),88 and thus would be 

eligible as ‘‘research services’’ under the 

safe harbor.89 Similarly, other data 

would be eligible under the safe harbor 

if they reflect substantive content—that 

is, the expression of reasoning or 

knowledge—related to the subject 

matter identified in the statute. For 

example, we believe that company 

financial data and economic data (such 

as unemployment and inflation rates or 

gross domestic product figures) would 

be eligible as research under Section 

28(e). 

As discussed above, in order for a 

product or service to be within the safe 

harbor, it must not only satisfy the 

specific criteria of the statute, but it also 

must provide the money manager with 

lawful and appropriate assistance in 

making investment decisions. This 

standard focuses on how the manager 

uses the eligible research. For example, 

some money managers appear to be 

using client commissions to pay for 

analyses of account performance that 

are used for marketing purposes.90

Although analyses of the performance of 

accounts are eligible research items 

because they reflect the expression of 

reasoning or knowledge regarding 

subject matter included in Section 

28(e)(3)(B), these items when used for 

marketing purposes are not within the 

safe harbor because they are not 

providing lawful and appropriate 

61708 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

91As discussed below in the mixed-use section, 

if the manager uses account performance analyses 

for both marketing purposes and investment 

decision-making, the manager may use client 

commissions only to pay for the allocable portion 

of the item attributable to use for investment 

decision-making under Section 28(e). See infra 

Section III.E. 

92 15 U.S.C. 78bb(e)(3)(C). 

93See NASD Rule 11860(a)(5); New York Stock 

Exchange (‘‘NYSE’’) Rule 387(a)(5); American Stock 

Exchange Rule 423(5); Chicago Stock Exchange 

Article XV, Rule 5; Pacific Exchange Rule 9.12(a)(5); 

Philadelphia Stock Exchange Rule 274(b). 

94 1998 OCIE Report, at 35–36, 50. 

95The NASD Task Force Report made a similar 

observation, and recommended that the 

Commission ‘‘monitor the use of the safe harbor for 

brokerage services for such inappropriate attempts 

to maintain the status quo by expanding the 

brokerage services aspect of the safe harbor.’’ NASD 

Task Force Report, at 7 n.20. 

96See Securities Acts Amendments of 1974, H.R. 

5050, 93d Cong. (1974) (House bill on safe harbor 

referred to ‘‘brokerage services, including * * * 

research or execution services’’); H.R. Rep. No. 93–

1476 (1974) (House Committee Report on H.R. 5050 

referred to ‘‘brokerage’’ as ‘‘research and other 

services related to the execution of securities 

transactions’’); Joint Explanatory Statement of the 

Comm. of Conference, Securities Acts Amendments 

of 1975, H.R. Conf. Rep. No. 94–229, at 108 (1975), 

reprinted in 1975 U.S.C.C.A.N. 321, 338 (House 

Conference Report on final House bill on Section 

28(e) describes the safe harbor as relating to paying 

more than the lowest available price for ‘‘execution 

and research services’’). 

97Unlike research, brokerage services can include 

connectivity services and trading software where 

they are used to transmit orders to the broker, 

because this transmission of orders has traditionally 

been considered a core part of the brokerage service. 

We believe that mechanisms to deliver research, on 

the other hand, are separable from the research and 

the decision-making process. 

98For example, to the extent that money 

managers use trade analytics both for research and 

to assist in fulfilling contractual obligations to the 

client or to assess whether they have complied with 

their own regulatory or fiduciary obligations such 

assistance to the money manager in 

performing his investment decisionmaking responsibilities.91

D. Eligibility Criteria for ‘‘Brokerage’’

Under Section 28(e)(3); Lawful and 

Appropriate Assistance 

Under Section 28(e)(3)(C) of the Act, 

a person provides ‘‘brokerage * * * 

services’’ insofar as he or she: 

effects securities transactions and performs 

functions incidental thereto (such as 

clearance, settlement, and custody) or 

required in connection therewith by rules of 

the Commission or a self-regulatory 

organization of which such person is a 

member or in which such person is a 

participant.92

Section 28(e)(3)(C) describes the 

brokerage products and services that are 

eligible under the safe harbor. In 

addition to activities required to effect 

securities transactions, Section 

28(e)(3)(C) provides that functions 

‘‘incidental thereto’’ are also eligible for 

the safe harbor, as are functions that are 

required by Commission or selfregulatory organization (‘‘SRO’’) rules. 

Clearance and settlement services in 

connection with trades effected by the 

broker are explicitly identified as 

eligible incidental brokerage services. 

Therefore, the following post-trade 

services relate to functions incidental to 

executing a transaction and are eligible 

under the safe harbor as ‘‘brokerage 

services’’: post-trade matching; 

exchange of messages among brokerdealers, custodians, and institutions; 

electronic communication of allocation 

instructions between institutions and 

broker-dealers; and routing settlement 

instructions to custodian banks and 

broker-dealers’ clearing agents. 

Similarly, services that are required by 

the Commission or SRO rules are 

eligible under the safe harbor. For 

example, in certain circumstances, the 

use of electronic confirmation and 

affirmation of institutional trades is 

required in connection with settlement 

processing.93

In 1998, OCIE staff recommended that 

the Commission provide further 

guidance on the scope of the safe harbor 

concerning the use of items that may 

facilitate trade execution, based on 

examiners’ reports that 

[t]he technological explosion in the money 

management industry has been met with an 

increasing use of soft dollars to purchase 

state-of-the-art computer and 

communications systems that may facilitate 

trade execution. * * * The use of soft dollars 

to purchase these products may present 

advisers with questions similar to those 

surrounding computers purchased for 

research and analysis, i.e., how should an 

adviser distinguish between ‘brokerage’

services and ‘overhead’ expenses.94

In addition, we recognize that to the 

extent that this release would narrow 

the scope of eligible research under the 

safe harbor, there is a risk that, without 

further guidance on brokerage, some 

services and products that were 

previously classified as research could 

be inappropriately reclassified as 

brokerage.95 For these reasons, we are 

providing the guidance set forth below 

to assist money managers in 

determining whether items are eligible 

as ‘‘brokerage services’’ under the safe 

harbor. 

Guided by the statute and legislative 

history, we believe that Congress 

intended ‘‘brokerage’’ services under the 

safe harbor to relate to the execution of 

securities transactions.96 In our view, 

brokerage under Section 28(e) should 

reflect historical and current industry 

practices that execution of transactions 

is a process, and that services related to 

execution of securities transactions 

begin when an order is transmitted to a 

broker-dealer and end at the conclusion 

of clearance and settlement of the 

transaction. We believe that this 

temporal standard is an appropriate way 

to distinguish between ‘‘brokerage 

services’’ that are eligible under Section 

28(e) and those products and services, 

such as overhead, that are not eligible. 

Specifically, for purposes of the safe 

harbor, we believe that brokerage begins 

when the money manager 

communicates with the broker-dealer 

for the purpose of transmitting an order 

for execution and ends when funds or 

securities are delivered or credited to 

the advised account or the account 

holder’s agent. Unlike brokerage, 

research services include services 

provided before the communication of 

an order. Thus, advice provided by a 

broker before an order is transmitted 

may fall within the research portion of 

the safe harbor, but not the brokerage 

portion of the safe harbor. 

Under this temporal standard, 

communications services related to the 

execution, clearing, and settlement of 

securities transactions and other 

incidental functions, i.e., connectivity 

service between the money manager and 

the broker-dealer and other relevant 

parties such as custodians (including 

dedicated lines between the brokerdealer and the money manager’s order 

management system; lines between the 

broker-dealer and order management 

systems operated by a third-party 

vendor; dedicated lines providing direct 

dial-up service between the money 

manager and the trading desk at the 

broker-dealer; and message services 

used to transmit orders to broker-dealers 

for execution) are eligible under Section 

28(e)(3)(C). In addition, trading software 

operated by a broker-dealer to route 

orders to market centers and algorithmic 

trading software is ‘‘brokerage.’’ 97

On the other hand, order management 

systems (‘‘OMS’’) used by money 

managers to manage their orders 

(including OMS developed in-house by 

the manager and those obtained from 

third-party vendors) and hardware, such 

as telephones or computer terminals, are 

not eligible for the safe harbor as 

‘‘brokerage’’ because they are not 

sufficiently related to order execution 

and fall outside the temporal standard 

for ‘‘brokerage’’ under the safe harbor. 

Products and services such as trade 

analytics, surveillance systems, or 

compliance mechanisms, do not qualify 

as ‘‘brokerage’’ in the safe harbor 

because they are not integral to the 

execution of orders by the brokerdealers, i.e., they fall outside the 

temporal standard described above.98

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61709 

as the duty of best execution or for other internal 

compliance purposes, the trade analytical software 

is a mixed-use product, and managers must use 

their own funds to pay for the allocable portion of 

the cost of the software that is not within the safe 

harbor because it is attributable to internal 

compliance purposes. See supra note 1. 

99We note that the staff has taken a similar 

position. See Charles Lerner, Department of Labor, 

No-Action Letter (Oct. 25, 1988) (Dept. of Labor 

(‘‘DOL’’) sought Commission staff advice regarding 

applicability of Section 28(e) to commission 

practices discovered by DOL investigators involving 

ERISA plans). 

100See 1986 Release, 51 FR at 16007. 

101 Id. at 16006–07. 

102 Id. 

103 Id. at 16006 n.13. 

104 1998 OCIE Report, at 32–34. 105 Id. 106As noted above, this proposed interpretation 

would replace Sections II and III of the 1986 

Release. 107 1986 Release, 51 FR at 16006. The 

Commission may further address the 

documentation of mixed-use items at a later time. 108Similarly, if the money manager seeks the 

protection of the safe harbor and receives both 

Section 28(e) eligible and ineligible products and 

services for a bundled commission rate, the 

manager must use his own funds to pay for the 

allocable portion of the cost of products and 

services that are not within the safe harbor. 

109As we noted in 1986, ‘‘[a] money manager 

should consider the full range and quality of a 

broker’s services in placing brokerage including, 

among other things, the value of research provided 

as well as execution capability, commission rate, 

financial responsibility, and responsiveness to the 

money manager* * *. [T]he determinative factor is 

not the lowest possible commission cost but 

whether the transaction represents the best 

qualitative execution for the managed account.’’

1986 Release, 51 FR at 16011. See also supra note 

5. 

110See House Comm. on Interstate and Foreign 

Commerce, Securities Acts Amendments of 1975, 

H.R. No. 94–123, at 95 (1975). The report states that: 

‘‘It is, of course, expected that money managers 

paying brokers an amount [of commissions] which 

is based upon the quality and reliability of the 

broker’s services including the availability and 

value of research, would stand ready and be 

required to demonstrate that such expenditures 

were bona fide.’’ See also 1986 Release, 51 FR at 

16006–16007. 

111 In other situations, the Commission has 

imposed sanctions on money managers and brokerdealers for failing to disclose conflicts associated 

with the use of brokerage commissions to 

compensate broker-dealers for marketing particular 

funds (a practice known as payment for shelfspace). See, e.g., Edward D. Jones & Co., L.P., 

Securities Act Release No. 8520 (Dec. 22, 2004); 

Franklin Advisers, Inc. and Franklin/Templeton 

Distributors, Inc., Advisers Act Release No. 2337 

(Dec. 13, 2004). Cf. Investment Company Act 

Release No. 26591 (Sept. 2, 2004), 69 FR 54728 

(Sept. 9, 2004) (Commission adopted Rule 12b–1(h) 

under the Investment Company Act, which 

prohibits funds from using brokerage to pay for 

distribution). 

Moreover, error correction trades or 

related services in connection with 

errors made by money managers are not 

related to the initial trade for a client 

within the meaning of Section 

28(e)(3)(C) because they are separate 

transactions to correct the manager’s 

error, not to benefit the advised account, 

and thus error correction functions are 

not eligible ‘‘brokerage services’’ under 

the safe harbor.99 The products and 

services described in this paragraph are 

properly characterized as ‘‘overhead’’

and are ineligible under Section 28(e). 

As with research, in order to obtain 

safe harbor protection for products and 

services that are eligible as brokerage, 

the money manager must be able to 

show that the eligible product or service 

provides him or her lawful and 

appropriate assistance in carrying out 

the manager’s responsibilities, and the 

manager must make a good faith 

determination that the amount of 

commissions paid is reasonable in 

relation to the value of the research and 

brokerage product or service received. 

E. ‘‘Mixed-Use’’ Items 

As discussed above, the 1986 Release 

introduced the concept of ‘‘mixed 

use.’’ 100 Where a product obtained with 

client commissions has a mixed use, a 

money manager faces an additional 

conflict of interest in obtaining that 

product with client commissions.101

The 1986 Release stated that where a 

product has a mixed use, a money 

manager should make a reasonable 

allocation of the cost of the product 

according to its use, and emphasized 

that the money manager must keep 

adequate books and records concerning 

allocations in order to make the 

required good faith determination.102

Moreover, the allocation determination 

itself poses a conflict of interest for the 

money manager that should be 

disclosed to the client.103 It appears 

that, in practice, some managers may 

have made questionable mixed-use 

allocations and failed to document the 

bases for their allocation decisions.104

Lack of documentation makes it difficult 

for the manager to make the required 

good faith showing of the 

reasonableness of the commissions paid 

in relation to the value of the portion of 

the item allocated as brokerage and 

research under Section 28(e), and also 

makes it difficult for compliance 

personnel to ascertain the basis for the 

allocation.105

We continue to believe that the 

‘‘mixed-use’’ approach is appropriate. In 

that connection, we reiterate today the 

Commission’s guidance provided in the 

1986 Release regarding the mixed-use 

standard: 106 ‘‘The money manager must 

keep adequate books and records 

concerning allocations so as to be able 

to make the required good faith 

showing.’’ 107 As stated above, the 

mixed-use approach requires a money 

manager to make a reasonable allocation 

of the cost of the product according to 

its use. For example, an allocable 

portion of the cost of portfolio 

performance evaluation services or 

reports may be eligible as research, but 

money managers must use their own 

funds to pay for the allocable portion of 

such services or reports that is used for 

marketing purposes.108

F. The Money Manager’s Good Faith 

Determination as to Reasonableness 

Under Section 28(e) 

Section 28(e) requires money 

managers who are seeking to avail 

themselves of the safe harbor to make a 

good faith determination that the 

commissions paid are reasonable in 

relation to the value of the brokerage 

and research services received.109 The 

Commission reaffirms the money 

manager’s essential obligation under 

Section 28(e) to make this good faith 

determination. The burden of proof in 

demonstrating this determination rests 

on the money manager.110

A money manager satisfies Section 

28(e) if he or she can demonstrate that 

the item is eligible under the language 

of the statute, the manager has used the 

item in performing decision-making 

responsibilities for accounts over which 

he exercises investment discretion, and, 

in good faith, the manager believes that 

the amount of commissions paid is 

reasonable in relation to the value of the 

research or brokerage product or service 

received, either in terms of the 

particular transaction or the manager’s 

overall responsibilities for discretionary 

accounts. Thus, for example, a money 

manager may purchase an eligible item 

of research with client commissions if 

he or she properly uses the information 

in formulating an investment decision, 

but another money manager cannot rely 

on Section 28(e) to acquire the very 

same item if the manager does not use 

the item for investment decisions or if 

the money manager determines that the 

commissions paid for the item are not 

reasonable with respect to the value of 

the research or brokerage received. 

Similarly, a money manager may not 

obtain eligible products, such as market 

data, to camouflage the payment of 

higher commissions to broker-dealers 

for ineligible services, such as shelf 

space.111 In this instance, the money 

manager could not make the 

determination, in good faith, that the 

commission rate was reasonable in 

relation to the value of the Section 28(e) 

eligible products because the 

commission would incorporate a 

payment to the broker-dealer for the 

non-Section 28(e) services. Further, if 

research products or services that are 

eligible under Section 28(e)(3) have 

61710 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

112Section 28(e)(1) states in relevant part: 

No person * * * shall be deemed to have acted 

unlawfully or to have breached a fiduciary duty 

* * * solely by reason of his having caused the 

account to pay a member of an exchange, broker, 

or dealer an amount of commission for effecting a 

securities transaction in excess of the amount of 

commission another member of an exchange, 

broker, or dealer would have charged for effecting 

that transaction, if such person determined in good 

faith that such amount of commission was 

reasonable in relation to the value of the brokerage 

and research services provided by such member, 

broker, or dealer, viewed in terms of either that 

particular transaction or his overall responsibilities 

with respect to the accounts as to which he 

exercises investment discretion. 15 U.S.C. 

78bb(e)(1) (emphasis added). 

113See 1976 Release, 41 FR at 13679 (Section 

28(e) ‘‘might, under appropriate circumstances, be 

applicable to situations where a broker provides a 

money manager with research produced by third 

parties’’). See also 1986 Release, 51 FR at 16007 

(‘‘Although the legislative history of Section 28(e) 

includes a strong statement that commission dollars 

may be paid only to the broker-dealer that 

‘‘provides’’ both the execution and research services 

and that the section does not authorize the 

resumption of ‘‘give-ups,’’ it seems unlikely that 

Congress intended to forbid certain common 

practices that were then considered permissible and 

whose elimination would be anti-competitive.’’); III 

Report, 19 SEC Docket at 932 (broker need not 

produce research services ‘‘in house’’). 

114See 1986 Release, 51 FR at 16007; III Report, 

19 SEC Docket at 932. 

115Exchange Act Release No. 17371 (Dec. 12, 

1980), 45 FR 83707, 83714 n.54 (Dec. 19, 1980) 

(‘‘Papilsky Release’’). See 1986 Release, 51 FR at 

16007. In the Papilsky Release, the Commission 

addressed Section 28(e) and third-party research in 

the context of defining ‘‘bona-fide research’’ for 

purposes of NASD rules that relate to obtaining 

research in a fixed-price offering. 

116Papilsky Release, 45 FR at 83714 n.54. See 

1986 Release, 51 FR at 16007. 

117Papilsky Release, 45 FR at 83714 n.54. 

118OCIE reported that approximately 27% of the 

broker-dealers examined were paying invoices 

submitted directly by investment advisers for 

payment obligations of the investment advisers to 

the third parties. See 1998 OCIE Report, at 24–25. 

119 15 U.S.C. 78bb(e). 

120 In enacting Section 28(e), Congress described 

give-ups as a ‘‘regrettable chapter in the history of 

the securities industry and the limited definition of 

fiduciary responsibility added to the law by this bill 

in no way permits its return.’’ Joint Explanatory 

Statement Of The Comm. Of Conference, Securities 

Acts Amendments Of 1975, H.R. Conf. Rep. No. 94–

229, at 108 (1975), reprinted in 1975 U.S.C.C.A.N. 

321, 339. 

121 Give-ups took several forms, but typically 

occurred when a mutual fund (or its money 

manager or underwriter) directed an executing 

broker-dealer to pay a portion of a commission 

payment to another broker-dealer that was a 

member of the same exchange as the executing 

broker-dealer. The give-up often was payment for 

other services (that may have been unrelated to the 

trade) provided to the fund (or its adviser or 

underwriter) by the give-up recipient. See Division 

of Market Regulation, U.S. Securities and Exchange 

Commission, Market 2000: an Examination of 

Current Equity Market Developments (Jan. 1994), 

1994 SEC LEXIS at 32–33 (citing Special Study, 

H.R. Doc. No. 88–95, pt. 2, at 316–317 and pt. 4, 

at 213–14). This type of give-up produced a conflict 

of interest for the adviser ‘‘between the interest of 

fund shareholders in lower commission charges and 

the interest of mutual fund advisers and 

underwriters in stimulating the sale of additional 

shares through directing a split of commission 

charges.’’ Special Study, H.R. Doc. No. 88–95, pt. 

2, at 318. 

122See, e.g., Provident Management Corp., 44 SEC 

442, 445–47 (Dec. 1, 1970) (finding violations of the 

antifraud provisions of the federal securities laws 

where unaffiliated broker-dealers who participated 

with the fund’s officers, adviser, and affiliated 

broker-dealer in a reciprocal arrangement in which 

fund transactions were placed with unaffiliated 

broker-dealer in exchange for payment to affiliated 

broker-dealer of ‘‘clearance commissions’’ on 

unrelated transactions for which affiliated brokerdealer performed no function). The Commission has 

found it a violation of the antifraud provisions of 

the securities laws to interpose an unnecessary 

party in a transaction, resulting in payment to the 

interposed party, and an additional cost to the 

fiduciary account. See Delaware Management Co., 

43 SEC 392 (1967) (interpositioning broker between 

adviser and market maker caused adviser to pay 

unnecessary brokerage costs and violated the 

adviser’s duty of best execution). 

123 Joint Explanatory Statement of the Comm. of 

Conference, Securities Acts Amendments of 1975, 

H.R. Conf. Rep. No. 94–229, at 109 (1975), reprinted 

in 1975 U.S.C.C.A.N. 321, 339. See also 1986 

Release, 51 FR at 16007; 1976 Release, 41 FR at 

13679. 

124 1986 Release, 51 FR at 16007 (‘‘Section 28(e) 

was not intended to exclude from its coverage the 

payment of commissions made in good faith to an 

introducing broker for execution and clearing 

services performed in whole or in part by the 

introducing broker’s normal and legitimate 

correspondent.’’); 1976 Release, 41 FR at 13678 

(Under Section 28(e), money managers may not 

direct brokers employed by them to ‘‘give-up’’ part 

of the commission negotiated by the broker and the 

money manager to another broker designated by the 

money manager for whom the executing or clearing 

broker is not a normal and legitimate 

correspondent.). 

been simply copied, repackaged, or 

aggregated, the money manager must 

make a good faith determination that 

any additional commissions paid in 

respect of such copying, repackaging, or 

aggregation services are reasonable. 

G. Third-Party Research and 

Commission-Sharing Arrangements 112

Third-party research arrangements 

can benefit advised accounts by 

providing greater breadth and depth of 

research. First, these arrangements can 

provide money managers with the 

ability to choose from a broad array of 

independent research products and 

services. Second, the manager can use 

third-party arrangements to obtain 

specialized research that is particularly 

beneficial to their advised accounts. 

1. Research Services Must Be ‘‘Provided 

by’’ the Broker-Dealer 

Section 28(e) requires that the brokerdealer receiving commissions must 

‘‘provide’’ brokerage or research 

services. The Commission has 

interpreted this to permit money 

managers to use client commissions to 

pay for research produced by someone 

other than the executing broker-dealer, 

in certain circumstances (referred to as 

‘‘third-party research’’).113 The essential 

feature of the ‘‘provided by’’ element is 

that the broker-dealer has the direct 

legal obligation to pay for the 

research.114 The Commission also has 

clarified that research provided in thirdparty arrangements is eligible under 

Section 28(e) even if the money manager 

participates in selecting the research 

services or products that the brokerdealer will provide.115 The third party 

may send the research directly to the 

broker’s customer so long as the brokerdealer has the obligation to pay for the 

services.116 In contrast, a money 

manager may not rely upon Section 

28(e) if he uses the broker-dealer merely 

to pay an obligation that he has incurred 

with a third party.117 The 1998 OCIE 

Report discussed instances in which 

some money managers had entered into 

such arrangements whereby brokerdealers paid for research or brokerage 

services for which the money managers 

were obligated to pay.118 The 

Commission reminds money managers 

and broker-dealers that these 

arrangements are not eligible for the 

Section 28(e) safe harbor. 

2. ‘‘Effecting’’ Transactions 

Section 28(e) requires that the brokerdealer providing the research also be 

involved in ‘‘effecting’’ the trade.119 The 

inclusion of this element in Section 

28(e) was principally intended to 

preclude the practice of paying ‘‘giveups.’’ 120 Specifically, when brokerage 

commissions were fixed before 1975, a 

‘‘give-up’’ was a payment to another 

broker-dealer of a portion of the 

commission required to be charged by 

the executing broker-dealer.121 The 

broker-dealer receiving the give-up may 

have had no role in the transaction 

generating the commission, and it may 

not even have known where or when 

the trade was executed. Because the 

portion of the commission ‘‘given up’’ is 

a charge above the cost of execution on 

client accounts and because the brokerdealer receiving the ‘‘e-up’’ did nothing 

in connection with the securities trade 

to benefit investors, the Commission 

found that these arrangements violated 

the securities laws.122 In enacting 

Section 28(e), Congress addressed the 

issue of give-ups by indicating that the 

provision did not apply when the 

money manager made payment to one 

broker-dealer for the services performed 

by another broker-dealer.123 In the 1986 

Release, the Commission indicated that 

payment of a part of a commission to a 

broker-dealer who is a ‘‘normal and 

legitimate correspondent’’ of the 

executing or clearing broker-dealer 

would not necessarily be a ‘‘give-up,’’

outside the protection of Section 

28(e).124

Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 61711 

125The 1986 Release suggested that protection of 

Section 28(e) would not be lost merely because the 

money manager by-passed the order desk of the 

introducing broker and called his orders directly 

into the clearing broker. 1986 Release, 51 FR at 

16007. 

For purposes of this discussion, commissionsharing arrangements are different from ‘‘step-outs.’’

In a step-out, the investment manager directs the 

executing broker to allocate all or a certain number 

of shares of an executed trade, e.g., 100 shares of 

a 1000 share trade, to another broker-dealer for 

clearance and settlement. In this example, the 

executing broker executes the entire trade, clears 

and settles 900 shares, and receives the commission 

for 900 shares. The second or ‘‘stepped-in’’ broker 

clears and settles 100 shares and negotiates the 

commission for 100 shares with the manager. The 

executing broker may not know what commission 

is paid to the stepped-out broker or what services 

(other than clearance and settlement) are provided 

by the stepped-out broker to the manager. Step-outs 

have been used, at the client’s direction, where the 

client has a commission recapture arrangement 

with the ‘‘stepped-in’’ broker. In the past, step-outs 

were used to reward the ‘‘stepped-in’’ broker-dealer 

for fund distribution or to obtain ‘‘brokerage and 

research services.’’ See Thomas P. Lemke and 

Gerald T. Lins, Soft Dollars and Other Brokerage 

Arrangements 4–16 to 4–17 (2004). Provided that 

each broker in a step-out performs substantive 

functions in effecting trades, e.g., clearance and 

settlement, such arrangements may be eligible for 

the safe harbor. 

126 1986 Release, 51 FR at 16007, quoting Data 

Exchange Securities, No-Action Letter (Apr. 20, 

1981). 

Where two broker-dealers are involved in a 

commission-sharing arrangement that otherwise 

satisfies Section 28(e), one of the broker-dealers 

must be financially responsible for providing the 

research. See 1986 Release, 51 FR at 16007; III 

Report, 19 SEC Docket at 932. 

127See, e.g., NYSE Rule 382, ‘‘Carrying 

Agreements,’’ 2 NYSE Guide ¶ 2382, Rule 382; 

NASD Rule 3230, ‘‘Clearing Agreements’; NASD 

Rules of Fair Practice, Section 47, Article III; 

American Stock Exchange Rule 400 (mirrors the 

provisions of NYSE Rule 382(b)). 

128For example, NYSE Rule 382 specifies that 

each fully-disclosed clearing agreement between 

SRO members shall allocate to the respective 

member the following functions: (i) Opening, 

approving, and monitoring of accounts; (ii) 

extension of credit; (iii) maintenance of books and 

records; (iv) receipt and delivery of funds and 

securities; (v) safeguarding of funds and securities; 

(vi) confirmations and statements; (vii) acceptance 

of orders and execution of transactions. NYSE Rule 

382(b). Further, the clearing broker must provide 

annually to the introducing broker-dealer a list of 

reports to assist the introducing broker to supervise 

and monitor its customer accounts and to fulfill its 

responsibilities under the agreement as well as 

deliver, and retain a copy of, those reports that the 

introducing broker requests. NYSE Rule 382(e)(1) 

and (2). 

129Step-outs may not require clearing agreements 

but may be within Section 28(e) if each broker 

performs substantive functions in effecting the trade 

(e.g., clearance and settlement). See supra note 125. 

130 Introducing and clearing brokers still remain 

subject to all applicable securities laws and 

regulations and SRO rules. For instance, nothing in 

this release changes in any way the applicability of 

anti-money laundering (‘‘AML’’) laws and 

regulations applicable to an introducing broker or 

a clearing broker. See, e.g., Currency and Foreign 

Transactions Reporting Act of 1970 (‘‘Bank Secrecy 

Act’’), [31 U.S.C. 5311 et seq.] (as amended by the 

Uniting and Strengthening America by Providing 

Appropriate Tools Required to Intercept and 

Obstruct Terrorism Act of 2001 (‘‘USA Patriot 

Act’’), Pub. L. 107–56, sec. 314, 326, 115 Stat. 272); 

Treasury regulations adopted under the Bank 

Secrecy Act [31 CFR Part 103]; Exchange Act Rule 

17a–8 [17 CFR 240.17a–8]; NYSE Rule 445; NASD 

Rule 3011. This interpretation also does not alter 

the introducing broker and the clearing broker’s 

supervisory obligations. See, e.g., Securities 

Exchange Act Section 15(b)(4)(E) [15 U.S.C. 

78o(b)(4)(E)]; NYSE Rules 342 and 405; NASD Rules 

3010, 3012, and 3013. This interpretation also does 

not alter a broker-dealer’s best execution obligation 

to its customers. See, e.g., NASD Rule 2320; NASD 

Notice to Members 01–22 (Apr. 2001). 

131See 1976 Release, 41 FR at 13679 (‘‘[N]or may 

money managers, under the authority of Section 

28(e), direct brokers employed by them to make 

‘‘give up’’ payments.’’; ‘‘[B]rokers should recognize 

that their compliance with any direction or 

suggestion by a fiduciary which would appear to 

involve a violation of the fiduciary’s duty to its 

beneficiaries could implicate them in a course of 

conduct violating the anti-fraud provisions of the 

federal securities laws.’’); III Report, 19 SEC Docket 

at 933 (Where brokers and money managers were 

aware that an intermediary was providing research 

to money managers in exchange for directing 

brokerage to the intermediary’s designated brokers, 

but brokers had limited participation in providing 

the research, ‘‘those involved should have realized 

that the arrangement was not permitted by Section 

28(e).’’; ‘‘[B]rokers should have been alerted to the 

possibility of conduct which contravened 

applicable fiduciary principles and the federal 

securities laws.’’). 

132See 1986 Release, 51 FR at 16007; III Report, 

19 SEC Docket at 932. 

133See supra notes 119–130 and accompanying 

text. 

Some investment managers today use 

‘‘commission-sharing’’ arrangements to 

execute trades with one broker-dealer 

and obtain research or other services 

from a different broker-dealer. In some 

commission-sharing arrangements, the 

introducing broker-dealer accepts orders 

from its customers and then may 

execute the trade and provide research, 

while a second broker-dealer clears and 

settles the transaction. In other 

commission-sharing arrangements, an 

‘‘introducing’’ broker-dealer retains a 

portion of the commission, and has 

little, if any, role in accepting customer 

orders or in executing, clearing, or 

settling any portion of the trade. Rather, 

another broker-dealer (often called the 

‘‘clearing broker’’) executes, clears, and 

settles the trade, receiving a portion of 

the commission for its services. In some 

instances, the introducing broker is 

unaware of the daily trading activity of 

its customers because the orders are sent 

by the money manager directly (and 

only) to the clearing broker-dealer.125

Where more than one broker-dealer is 

involved in a commission-sharing 

arrangement, the Commission takes the 

view that the ‘‘introducing broker [must 

be] engaged in securities activities of a 

more extensive nature than merely the 

receipt of commissions paid to it by 

other broker-dealers for ‘‘research 

services’’ provided to money 

managers.’’ 126

Commission-sharing arrangements 

typically involve clearing agreements 

pursuant to SRO rules.127 These SRO 

rules require that introducing and 

clearing firms contractually agree to 

allocate enumerated functions, but do 

not mandate how the functions should 

be divided (i.e., they do not specify the 

functions that must be done by the 

introducing broker-dealer or clearing 

broker-dealer).128 We note, however, 

that a clearing agreement that satisfies 

SRO rule requirements does not 

necessarily satisfy the criteria of Section 

28(e). Each broker-dealer must play a 

role in effecting securities transactions 

that goes beyond the mere provision of 

research services to money managers.129

The nature of the activities actually 

performed by each broker-dealer 

determines whether the commissionsharing arrangement qualifies under 

Section 28(e).130

In connection with commissionsharing arrangements, each party to the 

arrangement must determine if it is 

contributing to a violation of law, 

including whether the involvement of 

multiple parties to the trade is necessary 

to effecting the trade, beneficial to the 

client, and appropriate in light of all 

applicable duties.131 In particular, as 

discussed above, the broker-dealer 

involved in effecting the trade must also 

be legally obligated to pay for the thirdparty research or brokerage service (i.e., 

the ‘‘provided by’’ requirement).132

The following elements are necessary 

for a commission-sharing arrangement 

under which research and brokerage 

services are provided under the safe 

harbor: 

• The commission-sharing 

arrangement must be part of a normal 

and legitimate correspondent 

relationship in which each brokerdealer is engaged in securities activities 

of a more extensive nature than merely 

the receipt of commissions paid to it by 

other broker-dealers for research 

services provided to money managers 

(i.e., ‘‘effecting securities transactions’’

requirement).133 Based on the 

Commission’s experience, we believe 

that, at a minimum, this means that the 

introducing broker-dealer must: (1) Be 

financially responsible to the clearing 

broker-dealer for all customer trades 

until the clearing broker-dealer has 

received payment (or securities), i.e., the 

introducing broker-dealer must be at 

risk to the clearing broker-dealer for its 

customers’ failure to pay; (2) make and/ 

or maintain records relating to its 

customer trades required by 

Commission and SRO rules, including 

blotters and memoranda of orders; (3) 

monitor and respond to customer 

comments concerning the trading 

61712 Federal Register / Vol. 70, No. 205 / Tuesday, October 25, 2005 / Proposed Rules 

134See 1986 Release, 51 FR at 16007, citing SEI 

Financial Services Co., No-Action Letter (Dec. 15, 

1983), which identified these minimum functions 

for an introducing broker in a correspondent 

relationship. 

135See supra notes 113–118 and accompanying 

text. 

process; and (4) generally monitor 

trades and settlements;134 and 

• A broker-dealer effecting the trade 

(if not providing research and brokerage 

services directly) must be legally 

obligated to a third-party producer of 

research or brokerage services to pay for 

the service ultimately provided to a 

money manager (i.e., ‘‘provided by’’

requirement).135

IV. Request for Comments 

The Commission seeks comment on 

its proposed interpretive guidance 

regarding client commission practices 

under Section 28(e) of the Exchange 

Act. The Commission asks 

commentators to address whether the 

proposed interpretation has accurately 

identified the industry practices for 

which guidance would be most useful, 

and to offer comments on any 

significant issues arising under Section 

28(e) that this release has not addressed. 

The Commission also requests comment 

as to whether the proposed interpretive 

guidance would significantly affect the 

level and distribution of costs among 

industry participants and, if so, whether 

these effects would be beneficial to 

investors or otherwise serve the public 

interest. 

In addition, the Commission solicits 

comments on the following topics: 

Question 1. Does the Commission’s 

interpretation offer sufficient guidance 

with respect to the types of ‘‘advice,’’

‘‘analyses,’’ and ‘‘reports’’ that are 

eligible as ‘‘research services’’ under 

Section 28(e)? 

Question 2. How would investors, 

money managers, broker-dealers, and 

others be affected by the Commission’s 

interpretive guidance that client 

commissions cannot be used to obtain 

computer equipment as ‘‘research’’

under Section 28(e)? 

Question 3. Does the Commission’s 

interpretation offer appropriate 

guidance as to the eligibility of market 

data and trade analytical software under 

Section 28(e)? 

Question 4. Does the Commission’s 

interpretation offer sufficient guidance 

as to the eligibility of ‘‘brokerage’’

services, functions, and products under 

Section 28(e)? How would this guidance 

affect existing arrangements or 

practices? Is the Commission’s temporal 

standard sufficiently clear? Are there 

types of services that should be 

excluded from the safe harbor, even 

though they might appear to satisfy the 

temporal standard? If so, explain why 

those services should be excluded—for 

example, is the service unrelated to 

execution of transactions? 

Question 5. Does the Commission’s 

interpretation offer sufficient guidance 

about third-party research and 

commission-sharing arrangements? 

Question 6. How does the 

Commission’s interpretive guidance 

differ from the approaches that other 

regulators, SROs, market participants, 

trade organizations, and investor 

advocacy groups have adopted or 

recommended with respect to client 

commission practices? 

Question 7. Are there types of 

products or services that are commonly 

paid for with client commissions for 

which additional guidance would be 

useful? If so, please provide facts about 

these products and services and their 

components, and how they are used. For 

example, are client commissions 

commonly used to pay for proxy voting 

services? 

Question 8. Should the Commission 

provide additional guidance on the 

allocation and documentation of mixeduse items? 

Question 9. Concerns have been 

expressed by some industry participants 

and others that mass-marketed 

publications (publications that are 

widely circulated to the general public 

and intended for a broad, public 

audience) are part of a firm’s overhead 

and should not be paid for with client 

commissions. To what extent are these 

types of publications currently being 

paid for with client commissions? Are 

the purposes and uses of these types of 

publications distinguishable from those 

of traditional research products? Should 

the Commission provide further 

guidance in this area? 

Question 10. Should the Commission 

afford firms time to implement the 

interpretation? In commenting, please 

provide specific examples of any 

potential implementation issues. 

Dated: October 19, 2005. 

By the Commission. 

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–21247 Filed 10–24–05; 8:45 am] 

BILLING CODE 8010–01–P