What Is Commission Sharing Agreement

Therefore, an asset manager can pay for the research it uses by allowing search providers to “divide or divide” the commissions generated by their trades ONLY IF THEY ARE REGISTERED BROKER-DEALERS. It also means that the “introductory broker” must comply with the various rules set out in the July interpretive guidelines that define what a broker must do to “complete” a transaction. 5. The search service provider shall receive payments from a set of commissions intended for that purpose, but shall not perform any other function typical of the broker-dealer`s activity. In recent discussions with hedge funds, a key area of change is the management of commission-sharing agreements (CSAs). While dealing with research commission pools may not have had the drama of falling stock prices, the losses suffered by Lehman`s European funds in particular were both real and material. Thus, fund managers understand the significant benefits of CSAs, but question whether solutions can be found to the following problems: • Reduce counterparty risk by holding pools with a single principal or aggregate broker; Manage the complexity of the various elements of commission management;• Avoid information leakage through CSA payments via search templates;• Add more objectivity and granularity to broker review. Goldman`s letter to the SEC clearly sought clarification on whether the research providers participating in their Research XPRESS platform had to be registered broker-dealers for clients to ask Goldman Sachs to pay them from a pool of client commissions. In other words, Goldman wanted to make sure that research providers didn`t have to be brokers to get paid with a CCA. How do regulators and trustees propose to monitor the explosion of this calculation of commission funds for institutional clients? Traditionally, broker-dealers who provide investment research to institutional asset managers in the United States are remunerated for this activity by receiving brokerage commissions for the execution of securities transactions on managers` accounts.

Asset managers typically seek to structure these client commission agreements (CCAs) or “soft dollar” agreements (known as commission-sharing agreements (CSAs) outside the United States) to comply with the safe harbor set forth in Section 28(e) of the Securities Exchange Act of 1934. Section 28(e) Safe Harbor allows asset managers who meet safe harbor requirements to use commissions generated by their managed accounts to pay for research that has been or will be used on behalf of those accounts as part of the investment decision. In a traditional real estate business, a seller would enter into a contract with an agent or broker to register their property for a fixed percentage of the sale price. The agent is sponsored by a broker who works for a brokerage that lists the property in the Multiple Listing Service (MLS). The broker offers to share its final commission with any MLS broker member who brings a buyer who completes the purchase. This is Split #1. The broker and his agent then redistribute their separation based on the independent contractor agreement between them. Most agents seem to start and stick to a 50/50 split, in return they get some brokerage and marketing services. As they grow their business, brokers often increase the percentage of commission that goes to the agent to prevent them from closing a better deal.

Part of the reason this method hasn`t gained momentum is that buyers view the agent`s payment as negative. They don`t really understand that they pay anyway because the seller includes the commission in their selling price. Some agents offer to settle the process and then refund to the buyer all the money received in the form of a commission. Bill George`s comment: So, under this interpretation, can an investment advisor or mutual fund order that some of its commissions be reimbursed to its research department? Would that then be disclosed as an appropriation for administrative costs? And if the consultant`s son-in-law has a good idea for shares, can the advisor ask his preferred broker to send the son-in-law a portion of his commissions in exchange for the tip? Despite the confusion caused by the SEC`s no-action letter, it is clear that asset managers, in collaboration with their execution broker, can establish a “commission pool” for the express purpose of paying for research provided by broker-dealers or non-brokers. It also appears that the SEC`s “no-action” letter also allows a manager to create a commission pool from which to pay both B/D and non-B/D. ConclusionAs smart business thinking is evolving into a more sophisticated and diversified CSA model, using an informal, manual, and spreadsheet method to support this model is no longer a viable approach. As volume and complexity increase, an integrated central application is required. This is where specially developed software comes into play. The right technology solution can master complex financial processes and workflows.

Whichever technology to use, the first task is to recognize that there is a problem and go beyond the assumption of simplicity by mapping the different paths, processes and people involved and fully understanding the business process. As Einstein would say, it`s time for a new way of thinking to get us where we want to be. This article began with a basic definition of the commission model. The client on the list is charged a commission that currently averages between 4 and 8%, with 5 to 6% being common. The MLS member listing broker has agreed to share this commission, usually on a 50/50 split with any other broker or his agent who brings and closes a buyer. .