Series 7: 13.1.5. Restrictions On Soft Dollar Arrangements

13.1.5. Restrictions on Soft Dollar Arrangements

Investment companies and investment advisers often contract with broker-dealers to conduct research and brokerage services for their managed accounts. These services are not paid directly by the portfolio manager but indirectly as a commission on the broker-dealer’s account. Such payments are referred to as soft dollars.

For example, an investment adviser may direct a portion of the company’s trades to a brokerage firm in exchange for access to that firm’s market expertise. The broker will credit the brokerage fees as payment for the research. The investment company gains access to a wider variety of market information than it could fund on its own, and the broker gains a guaranteed business for a slightly inflated commission.

The payment in soft dollars for brokerage and research services is vulnerable to