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dvilayphet

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发表于 2011-7-11 19:11 | 只看该作者

Ethics: general question re soft dollar policies and client brokerage

question, something, difference
General question: why is there a stipulation as to what a firm can do with the cash it receives from client brokerage? Isn't the money fungible, i.e. what difference does it make whether they make general firm operating expense purchases from a "client brokerage" account vs. their firm's cash balance? Once client brokerage is received by a firm, isn't that cash the firm's property? I think I am missing something. Is the concept that if the firm were theoretically to liquidate, or if the client were to stop doing business with the firm, then the "client brokerage" would revert to the client?
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ayodayo

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发表于 2011-7-11 19:11 | 只看该作者
I posted a similar question on soft dollars earlier. Your answer clears the issue a bit but I am afraid I'm still confused...

In your example, is it the case that you will pay the broker too much and get rebate in cash (which you then use for your operating expenses)?

Or is it that you ask him not to send any research to you but instead ask him to pay your bills (in return for a high brokerage)?

Either way, I'm kind of a surprised if any reputable broker would do either of these.

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kkn006

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发表于 2011-7-11 19:11 | 只看该作者
I agree with both cpk and guille but I think it's also just helpful to try and look at why the brokerage is not the property of the asset manager's firm (think buy side).

"Posted by: cnd (IP Logged)
Date: December 28, 2010 09:57PM
... Once client brokerage is received by a firm, isn't that cash the firm's property?"
-No.

The brokerage was placed with the manager to place a trade ie execute a buy order for some sort of asset. So that money is not firm property.
Now perhaps that broker has some commision rate he/she charges to execute said trade. This is firm (brokers) property, and does indeed go to pay broker expenses and some would get retained as profit. This is on the sell side though.
The buy side manager typically charges some percentage of total assets managed on a monthly or quarterly basis and that is their property.
Both the commision and the managers fee though are not the same as the client brokerage.
The buy side, the asset manager who is managing the account has to use the additional benefit for directing brokerage of the client through broker x for that client for trades subject to ERISA and directly in the investment making decision. And then an amount approx. proportional to the amount of brokerage directed other wise.

As stated before though the soft dollar component is indeed best thought of as a benefit in kind. It's just an understanding that for directing your clients trade, or brokerage (as an asset manager), through broker x you get some research in return (quid pro quo relationship with the broker). But this quid pro quo benefit would not have existed were it not for the client's brokerage, thus it is ultimately client property and has to be used for their benefit.
I think the cause for the standard were alot of asset managers using the 'soft dollars' as a way run their funds and essentially reduce their operating expenses. So they were benefiting, potentially at the expense of their client if execution was poor.

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