Soft dollar standard question question, fiduciary, different, disclosed, benefit

thecfawannabe

“It is permissible to use client brokerage from AGENCY TRADES to obtain research which may not directly benefit the client. Over time, however, the client should receive a benefit from the research”.
“As long as no fiduciary regulations apply, it is permissible to use client brokerage obtained from PRINCIPAL TRADES to benefit other client accounts, as long as this is disclosed to the client and prior consent is received”.
Does anybody see the logic of different Agency and Principal trades treatment? If both agency and principal trades are client’s asset, why are there such exceptions?
Thank you

Dapper425

with principal trades you need consent & disclosure, vs. agency the client will gain a benefit over time even if the research obtained through it doesn’t immediately benefit the client? This is confusing.

sabre

Very confusing. Help!!!!

BC_MBA_student

Actually, I don’t even really know what’s the difference between an agency and a principal trade…

busprof

Principal trades are at a discount? I don’t know what that means.
Principal trades are from the firm’s own accounts. Agency trades are from client accounts.

thecfawannabe

my understanding is that a principal transaction means that the broker is selling you an asset out of its own inventory. So the ‘commission’ is implicitly built into the asset’s price. I suppose because it is less transparent (relative to broker commissions), you as the investment manager need to be more up front with clients about it…

agulani

Think about it this way:
Principal trade: Broker has a bond in their inventory that they bought for $980. They mark it up to $990 and sell it to the client. Part of that $10 is a commission that generated soft dollars. It is harder to figure out the commission and soft dollars on the bond since it is an over the counter market. For a long time, brokers just completely ignored it, because it was not as easy to separate out.
Agency Trade: A stock is trading at $50. You buy at $50 and pay a $1 commission. The commission generates soft dollars. In an agency trade, it is very clear what part of the transaction is commission, and if you know what the soft dollar policy is, exactly what % goes to soft dollars.