Frequently Asked Questions


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	Bulletin Board FAQs	Frequently Asked Questions The FAQs below are also posted in our Learning Center Bulletin Board where they are searchable. What is the Section 28(e) Safe Harbor? Section 28(e) of the Securities Exchange Act of 1934 allows money managers who have "investment discretion" over an account to generate commission dollars that are above base execution commissions for the purpose of paying for research and brokerage services that provide lawful and appropriate assistance to the money manager in the performance of its investment decision-making responsibilities (SEC 1986 "Revised Standard"). The Section 28(e) Safe Harbor allows the money manager to generate these commissions without fear of being in violation of their fiduciary duty. What are soft dollars? The practice of directing certain commission dollars to pay for third party research is called soft dollars. Several soft dollar programs over the years have been developed to facilitate this "soft dollar" payment. However the term "soft dollars" has long been recognized as confusing. In addition, it is not representative of the actual commission allocation for payment of research and brokerage services under Section 28(e). What are the component parts of a Section 28(e) trade? A Section 28(e) trade has two main components. The first component is that portion of the commission that is allocated for the actual execution of the trade. This is called the "execution commission". The second component is that portion of the commission which pays for research or brokerage service. This portion of the commission is called the "research commission". This research commission can be utilized for the payment of either proprietary or independent third party research. What is the difference between Proprietary Research and Independent Research? Proprietary Research is normally research that originates from the broker dealer that actually provides the transaction execution services. Independent Research is research that is normally provided by a third party who is independent from the broker dealer who actually provides the transaction execution services. What services that fall under the Section 28(e) Safe Harbor can be paid for through Charles River Brokerage, LLC? Charles River can pay for any eligible research or brokerage service that qualifies under the Section 28(e) Safe Harbor. How do I define what items fall under the Section 28(e) Safe Harbor and what items do not qualify? The first step in defining what items qualify for payment and what items do not qualify is to look at the SEC 1986 "Revised Standard" definition of what is research. The SEC 1986 "Revised Standard"states that the controlling principle to be used in determining if an item qualifies as research is whether it provides lawful and appropriate assistance to the money manager in the performance of its investment decision-making responsibilities. The second step is to make an assessment as to whether the product or service aids the money manager in their investment decision-making responsibility, rather than aiding the manager in marketing or general administrative activities The next step is to look at what items have historically been allowed and which items have not been allowed for payment under Section 28(e). Is there an SEC approved list of items that qualify for the Section 28(e) Safe Harbor? The SEC does not have an approved list. However the following items have historically been found to be within the purview of Section 28(e) Safe Harbor: Analytical Software Computer Analysis of Securities Portfolios Credit Rating Services Economic Analysis Fundamental Research Industry and Sector Reports Market Data Services News Services Order Management Systems Performance Analysis Portfolio Modeling Quantitative Analysis Research Publications Is there an SEC unapproved list for items that do not qualify under the Section 28(e) Safe Harbor? The SEC does not have an unapproved list. However the following items have historically been found to be outside of the scope of Section 28(e) Safe Harbor: Sales and Marketing Materials Recruitment and Training of Advisory Employees Computer Software Used for Recordkeeping Computer Software Used for Financial Accounting Computer Software Used for Tax Accounting Overhead and Administrative Expenses Business Entertainment Travel Costs and Meals Directed Brokerage Used to Reward Sales Efforts Salaries Payments for Order Errors What is a Mixed-Use Product? A mixed-use product is one that that provides both "research or brokerage services" as defined by Section 28(e) and other non research or brokerage-related services. If a money manager wishes to pay for a mixed-use product on a research commission basis, he must make "a reasonable allocation of the cost of the product or service according to its use. The percentage of the product or service or specific component that provides assistance to the money manager in the investment decision-making process may be paid in research commission dollars, while those products or services that provide administrative or other non-research assistance to the money manager are outside the Section 28(e) safe harbor and must be paid for by the money manager using his own funds. How do I accrue commissions and pay for research and brokerage services under the Safe Harbor provision of Section 28(e)? There are two methods of accrual and payment for research and brokerage services that qualify under Section 28 (e). There is the New Method and the Traditional Method of accruing commission dollars for payment. Under the New Method, which is the preferred method, of payment for items qualifying under Section 28(e), you first choose that firm, from the cadre of Execution and Clearing Firms in the Charles River Brokerage network, which offers the best base execution price. Then, by simply adding on the Section 28(e) commission to the base transaction cost, the manager creates the credits to be used for research and brokerage services. It is simple. It is transparent. Under the Traditional Method of payment for items qualifying under Section 28(e) you apply a set conversion ratio which converts commission dollars into Section 28(e) credits. As an example, if the gross commission rate on a US equity trade is six cents and the ratio applied is 1.5, then four cents goes toward payment of research and brokerage services. The remaining two cents goes toward execution. Another way to interpret a 1.5 ratio is to realize that a service that costs $10,000 in cash will require $15,000 in brokerage commissions to complete the payment.
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