49 Pages Posted: 23 Jul 2010
Date Written: July 22, 2010
An increasingly important question is how money managers can best equip themselves with the investment research necessary to fulfill fiduciary obligations to their baby boom clients, who will inevitably shift from equities to fixed income securities as they near and enter retirement. Rather than reflecting a conflict of interest, this essay argues that managers’ use of client commissions to pay for investment research is both legally permissible and in their account holders’ best interest. For over three decades Section 28(e) of the Securities Exchange Act has given managers a safe harbor from fiduciary suits and other legal actions when they use client commissions to acquire research on equity agency trades. Starting in 2001, however, the SEC began interpreting the safe harbor to protect “certain riskless principal” trades by brokers that do not hold or trade fixed income securities for their own account – known as “non-positioning brokers” – and on which the mark-up or mark-down can be stated as a commission equivalent. It has since found that the safe harbor applies to research provided by non-positioning brokers on agency trades in fixed income securities disclosed through a trade reporting system adequate to ensure proper transparency. Trade reporting systems for fixed income securities have evolved dramatically in recent years, and several non-positioning fixed income brokers have stepped in to fill the void, greatly expanding the opportunities money managers have to obtain research through fixed income trades.
Keywords: banks, brokerage industry, efficient bond market execution, fixed income, 401(k), Global Settlement Act 2003, Horan, IRAs, individual retirement accounts, MSRB, Mary Schapiro, NASD, NAV, net asset value, pension funds, portfolio, RIA, SEC Act 1934, SEC, Securities Exchange Commission, TRACE
JEL Classification: G21, G23, G24, H55, J26, K22
Suggested Citation: Suggested Citation
Johnsen, D. Bruce, Using Bond Trades to Pay for Third-Party Research (July 22, 2010). George Mason Law & Economics Research Paper No. 10-33. Available at SSRN: https://ssrn.com/abstract=1647277 or http://dx.doi.org/10.2139/ssrn.1647277