Client Alert

SEC Extends Section 28(e) Research Soft Dollar Safe Harbor to Certain Riskless Principal Transactions

January 01, 2002

Investment Management Practice Group

The Securities and Exchange Commission has amended its well established position on the reach of Section 28(e) of the Securities Exchange Act of 1934, as amended. Last month, the SEC issued an interpretive release stating that certain riskless principal transactions involving equity securities are now covered by Section 28(e), the safe harbor provision that permits money managers to use soft dollars generated by their clients’ brokerage transactions to obtain research products and services. The revised position applies only to riskless principal transactions in which the money manager pays the same price as the offsetting trade, and remuneration to the broker-dealer is reported separately. These transactions, according to the SEC, afford money managers the level of transparency necessary to determine whether the remuneration paid to the broker-dealer is reasonable in relation to the value of services received, as required by Section 28(e) and, thus, should be treated similarly to agency trades.

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