Thursday, June 26, 2008

The CCA/Soft Dollar Paradigm

The following post answers common questions related to CCAs, Soft Dollars, and how to use these arrangements to pay for 3rd party research services.

What are Client Commission Arrangements and how are they different from traditional soft dollars?

A Client Commission Arrangement – or CCA – is an arrangement where a fund manager, or trader, will instruct its executing brokerage firm to allocate a designated portion of the commission dollars it pays to the brokerage to in turn be used to pay for legitimate research services. In this scenario, the brokerage firm sends payment to the approved research service on behalf of the client (fund manager, or other).

Soft dollars, which have previously fallen out of favor due to abuses by investment managers, are monies designated from a commission pool to pay for research and services. CCAs, though paid for through the same commission pool, differ as they are seen as a far more transparent form of payment for independent research.

With an easier payment arrangement available to fund managers, paying for “a la carte” research and services – in this case, alternative research – has become more streamlined, and therefore the alternative research market has boomed in the past few years, in tandem with the use of CCAs. According to Integrity Research, the alternative research industry spawned $1.8 billion in revenue in 2006 and is expected to grow to $2.5 billion by 2010.

CCA usage has emerged as the most attractive way to maintain best execution pricing while also obtaining the highest quality research.

What are the advantages of “Unbundling” execution from research?

The advantage of unbundling lies in maintaining low execution fees and taking control over the quality of investment insight your fund demands. By unbundling these two important business components, clients are able to ensure they are paying for only best execution (i.e. 1/10 of a penny), and then can pay separately for research that their firm truly values. This capability eliminates the existing problem that many funds encounter with bundled services: they aren’t certain what they’re paying for – execution or research. In some cases, the research is not helpful to clients, but they perceive that the research comes ‘free’ with the cost of execution. Unbundling forces both execution providers and research providers to separately provide the highest quality offering, and ensures that the end user receives the best in both services.

How do I know if I am able to use CCAs? Who is qualified to pay with soft dollars?

If you are an investment manager or any type of institutional investor looking to obtain third party research, you are eligible to pay using CCAs or soft dollars. (See below for a more in-depth description of services that can be paid for via CCA.)

What are the advantages of using CCAs to pay for research?

CCAs are a smart and effective way to generate funding for your research initiatives. Investment banks want to maintain their execution business with you, so they will work with you to parcel your CCA dollars as you deem needed. As a result, you pay less for execution and take personal control over the research you wish to receive.

Is StreetBrains able to be paid for via CCAs?

With regards to Section 28(e) of the Securities Exchange Act of 1934, StreetBrains falls under the legal confines of Section 28(e) and thus our research can be provided through CCAs and soft dollar arrangements. We meet the following criteria:

(1) It must fall under the statutory limits of 28(e)
(2) It must “provide lawful and appropriate assistance in the performance of his (the advisor) investment decision-making responsibilities.”
(3) The amount of client commissions is reasonable in light of the value of the products or services provided by the broker dealer.”

In defining Street Brains as a “research service,” we meet the following clauses as stipulated in 28(e):

(A) furnishes advice, either directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities.
(B) furnishes analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts

How do I go about arranging CCA payments for StreetBrains research?

If you would like to arrange CCA payment for StreetBrains research, contact your prime broker to arrange CCA payments to be designated for payment to StreetBrains.

If you would like StreetBrains to arrange CCA payment, contact us with the name of your prime broker-dealer and we will take care of the rest.

Who should I contact at StreetBrains for more information regarding CCA payments?

Please contact Michael McLean at, or call at 212.430.3091.