CCA’s Go Global?

Anybody who has an interest in Client Commission Arrangements (CCA’s), Commission

Sharing Arrangements (CSA’s), brokerage commission disclosure, and brokerage soft
dollars, should visit and carefully read the article, “Client Commission Agreements
Go Global and Multi-Asset-Class” by Ivy Schmerken published on the Wall Street
Technology – Advanced Trading website on July 16 2008. *

A careful reading of the section of the article titled “CCA’s Go Global” is particularly
interesting if one focuses on the fact that CSA’s and CCA’s are very different regulatory
structures and the terminology should not be confused or used interchangeably,
particularly in a global context, as it has been by contributors to this article.

Client Commission Arrangements are a unique structure and process created by the
U.S. Securities and Exchange Commission. CCA’s allow brokers claiming to provide
“best execution” to execute trades and at the request of the brokers’ institutional advisor
clients’ pay for third-party research, “out of a commission pool”, with commissions “paid-
up above the fully-negotiated costs of execution” (i.e. soft dollars). The third party
research providers’ requests for payment, the advisors’ written request to release “pool
commissions” to third party research providers and the payments issued to third party
providers all provide a paper trail documenting and disclosing soft dollar payments to
third party research providers.

When issuing its July 12, 2005 “Commission Guidance Regarding the Appropriate Use
of Client Commissions . . .”, and announcing the creation of CCA’s, the SEC did not
issue guidelines for the unbundling and disclosure of brokerage commissions paid (by
fiduciary advisors to brokers) for proprietary services provided for excess commissions
“paid-up above the fully negotiated costs of brokerage execution” (i.e. soft dollars).
Therefore, as in the past, bundled undisclosed proprietary services provided to
(fiduciary) investment advisors by brokerage firms are not disclosed, so they are not
easily identified and they are rarely examined or tested for compliance with Section
28(e) of the Securities Exchange Act of 1934, or tested for fiduciary appropriateness.

Another important feature differentiating CCA’s from CSA’s is, in the CCA advisors’
requesting payments from their executing brokers to pay for third party services are
liable for regulatory compliance and they are liable for payment (to third party providers)
under the CCA, whereas, in the past, within the structure of CSA’s it was the broker
which was liable for complying with Section 28(e) and the broker was directly obligated
for payments to third party providers [under the “provided by” clause of the SEC’s
interpretation of Section 28(e)].

* See the URL: http://www.advancedtrading.com/showArticle.jhtml?articleID=209100489

CCA’s Go Global? by Bill George July 19, 2008 Page 1 of 2

At about the same time the SEC was studying soft dollar brokerage and the appropriate
uses of institutional advisors’ clients’ commissions in the U.S. (2003 -2005), foreign
regulators were also studying soft dollar regulations in their jurisdictions. In Great Britain
the Financial Services Authority (FSA) issued new regulations which included guidelines
for the disclosure and transparency of all services provided in exchange for institutional
advisors’ clients’ brokerage commissions paid-up above the fully negotiated costs of
execution. Following the FSA’s release MiFED in the European Union issued very
similar soft dollar disclosure requirements, as did the Canadian Securities Regulators.

It seems that most foreign regulators are satisfied with their regulations and guidelines
for the disclosure of soft dollar commissions. And, I haven’t heard of any jurisdictions
considering going backward to accept the structure and processes defined in the U.S.
and called Client Commission Arrangements (which facilitate non-disclosure of the
executing broker’s bundled proprietary services in advisory clients’ soft dollar brokerage
arrangements).

In consideration of the foregoing, it seems using the terms Client Commission

Arrangements and Commission Sharing Arrangements interchangeably, particularly
when discussing global compliance, is wrong and confusing. I imagine when U.S.
commission management systems are implemented in foreign jurisdictions they must be
adapted for compliance with local jurisdictions’ regulations relating to the disclosure soft
dollar commissions used to purchase proprietary services and third party services in
Commission Sharing Arrangements. As far as I know, no foreign regulatory jurisdiction
has adopted the structure and processes defined for U.S. Client Commission
Arrangements.

(One other point about the original Traders Technology article, one commenter, Robert
Iati, mentions that The FSA has “replaced soft dollar arrangements as a result of the
implementation of Rule CP176”. FSA Rule CP176 has not replaced soft dollar
arrangements. The Rule has clarified the definition of soft dollars and it provides
guidelines for how institutional investment advisors must disclose the uses of soft
dollars. Within CP176 there are instances where The Rule actually provides guidance
for the appropriate future uses of “soft dollars”. The use of the term soft dollars in The
Rule seems to strongly suggest that The Rule does not intend to replace soft dollars,
but is actually designed to define and clarify the requirements for brokerage commission
disclosure in soft dollar arrangements).

CCA’s Go Global? by Bill George July 19, 2008 Page 2 of 2