About 8% of the advisors we studied used phased transactions to meet their low dollar obligations to third parties. In a typical withdrawal agreement, an advisor forwards the trades to a broker-dealer with instructions that the broker-dealer executes the trade and that another broker-dealer offers products/services in low dollars. The broker-dealer performing the transaction "leaves" part of the commission in favor of the broker-dealer offering the product/service in low dollars. To generate more low dollars, an investment manager may pay too much for research or transactions, or for services that benefit another fund. This allows investors to remain in the dark while not profiting from their investment. While paragraph 28(e) may apply to obtaining low dollar credits earned on such transactions, it should be noted that an advisor`s decision to conduct such transactions on an agency basis must be consistent with his or her obligation to obtain the best price and execution for client transactions. Since its publication in 1986, the Commission and the courts have consistently emphasized the obligations of broker-dealers and advisors to achieve the best possible execution in all transactions with clients and clients.75 In the fourth quarter of 1998, our law firm XYZ Capital Management Ltd. the following proprietary third-party products/services/products/services in exchange for XYZ client commissions: 67We found twenty-six brokers who refused to pay for a product/service requested by an advisor that the brokers considered inappropriate under a low-dollar agreement. These products and services included: rent, travel and accommodation, legal services, a car phone, magazine subscriptions, office equipment, furniture and computers. Our results demonstrate the range of dollar weakness practices that exist today and the changes that have occurred since 1986 in the types of products available and the methods of their transfer. The results also suggest that broker-dealers and advisors do not consistently apply the standards set out in the 1986 press release. Based on these findings, and in particular the number of advisors who purchase non-research and mixed-use items with low dollars without disclosure or client consent, we conclude that it may be necessary to reiterate the interpretation of paragraph 28(e).
Given that we found that disclosure of weak dollar agreements by investment advisors was too often inadequate, it may also be necessary to re-emphasize the Board`s guidance on disclosure required for advisors in weak dollar agreements. As mentioned earlier, when relying on the Safe Harbor, advisors must make an appropriate allocation between hard dollars and unsuitable dollars for mixed-use products. Using soft dollars to buy these products can ask similar questions to those related to computers purchased for research and analysis, i.e. How should an advisor distinguish between "brokerage" services and overhead? We recommend that the Commission provide interpretive guidance to help asset managers distinguish between brokerage and overhead elements as regards elements that may facilitate the execution of transactions. Therefore, investment management company ABC spends commissions received from its investors doing business with XYZ in exchange for the research services provided by XYZ, and it would be a payment in soft dollars. Section 206 of the Advisors Act and section 10(b) of the Foreign Exchange Act and Rule 10b-5 of the Foreign Exchange Act contain comprehensive anti-fraud provisions that may apply to the involvement of advisors and broker-dealers in low-dollar fraudulent activities, depending on the relevant facts and circumstances. Section 15(b)(4)(E) of the Stock Exchange Act authorizes the Commission to impose penalties on any dealer-dealer who intentionally violates a provision of federal securities laws or who has aided or abetted the violation of another person by another person. Similarly, section 203(e) of the Consultants Act empowers the Commission to impose sanctions on consultants.
Section 21(C) of the Exchange Act and Section 203(k) of the Advisers Act also authorize the Commission to order persons who violate or cause violations of federal securities laws to refrain from or cause such violations. In addition, the Commission has the authority to sanction both advisors and broker-dealers who have failed to adequately supervise their employees who have committed violations of federal securities laws.63 Dealers and advisors should put in place appropriate procedures and controls to carry out their oversight functions and ensure compliance with the law. However, we found that 7.4% of the advisors we examined generated subsidized dollar loans for large otc businesses and 3.6% obtained soft-dollar loans for fixed-income fixed income securities. The agreements that advisors have with their broker-dealers to generate low dollar credits for major transactions vary. For example, an advisor received loans in subsidized dollars by trading U.S. Treasuries, supposedly on an agency basis. However, confirmations of these transactions included only the net amount of transactions and no commission amount paid by customers, suggesting that the transactions were likely to have been made on a principal or principal risk-free basis. In another example, an advisor asked a trader to raise/lower bond prices by 1/4 to 1/2 point, depending on whether the trade was a buy or a sell. The additional premium or discount generated low dollar credits for the advisor. In other agreements, the stated price may include an explicit or implicit mark-up or discount, some of which is used to generate benefits in low dollars.
We also found an agreement in which an advisor generated loans in subsidized dollars from financing transactions with reverse repurchase agreements. Generally, a particular product or service falls under the Safe Harbor if an advisor can demonstrate that the research or brokerage service purchased with low dollars: (i) is an appropriate research or brokerage service within the specific limits of the Safe Harbor, (ii) provides legal and appropriate assistance to fulfill an advisor`s investment decision-making obligations, including the appropriate treatment of "mixed-use" items (i.e., certain products and services may have a mixed use and are divided between hard and unsuitable dollars depending on how the advisor uses the products or services) and (iii) the amount of commissions paid by the client is appropriate given the value of the products or services provided by the broker-dealer […].