Although soft dollar transactions are still widespread, there is a growing movement to eliminate them. This is all the more true as financial reform and transparency issues are growing in the sector. Suppose an institutional investor pays six cents per share to a commission brokerage company. However, it could only cost three cents per share to trade. The other three cents are sweet dollars that are used to pay for additional services provided by intermediation. In exchange for paying these higher fees, the institutional investor could have access to the research. Despite the criticism, soft commissions are still widespread in the United States. They are legal elsewhere (Singapore, Hong Kong, Canada, United Kingdom) but more regulated than in the United States. For example, soft commissions are legal in Australia, but they must be fully disclosed. 2 A client commission agreement (CCA) widely referred to as the Commission Sharing Agreement (CSA) in the EU and elsewhere is a kind of soft dollar agreement that allows investment advisors to pay the investment broker separately for the execution of the trade and ask that broker to directly allocate part of the commission to an independent research provider.
CCCs consist of a percentage of performance fees that are used for research services provided to the investment advisor and paid by client commissions. Soft dollars can bring some benefits to investors. One of the main arguments is that they provide access to a greater diversity of research. From May 1, 1975, a date often referred to as “May Day” in the brokerage industry, brokers should negotiate commissions for each transaction with each client. Shortly before the deadline, brokers attempted to restructure by offering more services and negotiating the price of these services separately. Such a restructuring, known as “dissociation,” has led to discount brokers. In the meantime, the industry has campaigned with Congress for the right to maintain itself, including the cost of researching investments offered to institutional clients through their commission. The May 1 rule was then amended [in Section 28th) ] to give safe harbor status to any agent who pays more than the negotiated commission for research or services.
The investor essentially bears the research and other bundled services provided as part of a soft commission transaction, but an asset manager does not disclose them. They are integrated into trade costs, which has an impact on a fund`s long-term performance. Some speculate that fee-for-like commissions can increase the cost per share for the execution and execution of institutional affairs by about 2 to 3%, although there is little reliable research on this subject.