What are soft dollars?
Soft dollars are a means of paying for market data and research services through a brokerage firm’s account rather than your own company’s account. In general, soft dollar arrangements are allowable, so long as the services purchased with client commissions are used by the investment management firm to support their investment decision making process.
What is typically eligible under the SEC Section 28(e)?
In determining whether a product or service is eligible the investment manager must conclude that it is advice, analysis, or reports reflect substantive content and relate to the purchasing/selling of securities in its portfolio strategies or the performance of its accounts. These types of services could include:
- Research reports analyzing the performance of a particular company or stock;
- Quantitative analytical software, and software that provides analyses of securities portfolios;
- Discussions with research analysts relating to the advice in the analyzes of securities;
- Finance news letters and trade journals that are not mass marketed;
- Trading software used to route orders to market centers;
- Software that provides algorithmic trading strategies;
Additionally, certain market data and research may be eligible if it would include pre/post trade analytics, software, and other products that depend on market information to generate market research, advice from broker dealers on order execution, etc.
Soft Dollar Administration – Best Practices
A holistic soft dollar administration program should include market data, finance, and legal/compliance in the review process. As new service is added a determination is made of whether it is fully eligible or mixed-use. For existing services, you would also want your legal/compliance team involved in the approval process for those as services may get added to existing vendors and therefore need to be continually reviewed and approved by the respective process. Including these parties in your invoice approval workflow’s streamlines the continual administration and upkeep for soft eligible services and their internal approvals.
About S4 Market Data
S4 Market Data has over 30+ years of market data administration and vendor management experience. Based in Miami, they help financial institutions with data management, costs, and compliance. For more information, visit www.s4marketdata.com.