Securities Law

BCN 2006/12 - Request for Comment on Proposed National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research (“Soft Dollar” Arrangements) [BCN - Lapsed]

Published Date: 2006-07-21
Rescinded Date: 2012-05-30
Related Document(s):

Concurrently Published:

Today, the Canadian Securities Administrators (CSA) are publishing for comment proposed National Instrument 23-102, Use of Client Brokerage Commissions as Payment for Order Execution Services or Research (“Soft Dollar” Arrangements) and Companion Policy 23-102CP.

Although the Commission is publishing this rule and a notice requesting comments along with our colleagues, we want to get public input on some more fundamental questions before we decide whether to adopt the rule. Generally, we want to consider whether the rule is necessary or whether we could effectively deal with the regulatory risks and market problems this rule is designed to address by taking action under current Securities Rules.

Summary of the proposed rule
The proposed rule provides a specific framework for the use of client brokerage commissions by advisers. It sets out the broad characteristics of a limited class of goods and services that advisers would be permitted to acquire with these commissions. It also prescribes disclosure advisers would have to make when using brokerage commissions as payment for goods and services in addition to execution services.  

The proposed policy gives detailed guidance regarding the types of goods and services that may be obtained with client brokerage commissions, as well as non-permitted goods and services. It also gives guidance on the disclosure that the CSA would consider acceptable to meet the requirements of the proposed rule.

Alternative proposal
The Commission generally agrees that we should more actively regulate the use of soft dollars by providing some guidance on acceptable goods and services and requiring more meaningful disclosure. However, we question whether it is necessary to create a specific rule to achieve this. 

Section 14 of the Securities Rules requires registered advisers to deal fairly, honestly, and in good faith with clients. To comply with this requirement, in our view, advisers should already ensure that goods and services obtained with soft dollars provide value to the client, and that disclosure to clients about soft dollar transactions is useful and meaningful. The Commission could provide guidance on how section 14 applies to soft dollar transactions. This guidance, used in combination with other regulatory tools like education and compliance reviews, might prove to be as effective as, or more effective than, the proposed rule and policy in preventing abuses of soft dollars.

Request for comments
We are seeking comments on the regulatory approach you think we should adopt for dealing with soft dollar arrangements. More specifically, we request comments on the strengths and weakness of the approach reflected in the proposed rule, as well as your thoughts on the viability of an alternative approach like the one we suggest above. The following specific questions may serve as a guide in preparing your comments.  

  1. What types of goods and services acquired with soft dollars add value for the client? Please explain how.
  2. Do advisers find it difficult to determine the value of goods and services acquired with soft dollars? If so, why? What would make it easier?
  3. What do you think clients should get to satisfy any concerns they might have about conflicts of interest? What would assure clients that the services provided are unbiased and of direct benefit to them? As a client, what would you consider fair treatment?
  4. What disclosure would be meaningful to clients? What information do they need to determine whether they are receiving real and direct benefits from their advisers for their brokerage commissions, and whether any potential conflicts are being appropriately managed?
  5. What current best practices are used by advisers to ensure fair dealing with clients? What do advisers do now to ensure that their duty to clients is fulfilled in the absence of a specific rule? What should they do?
  6. Some evidence exists to suggest that industry is already making meaningful self-imposed reforms. We would like to know, particularly from institutional clients, whether soft dollar practices and client disclosures are a problem and, if so, whether the situation is improving. If so, how?

Comments

You can deliver comment letters in hard copy, by fax or by e-mail. Please address your submission to:

Tony Wong
Senior Legal Counsel, Capital Markets Regulation
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, BC  V7Y 1L2
Fax: (604) 899-6814
Tel: (604) 899-6764
Or 1-800-373-6393 (in BC and Alberta)
twong@bcsc.bc.ca

All comments received by October 19, 2006 will be considered. 

July 21, 2006

Douglas M. Hyndman
Chair

Ref:     National Instrument 23-102 Use of Client Brokerage Commissions as Payment  for Order Execution Services or Research (“Soft Dollar” Arrangements)Companion Policy 23-102CP Use of Client Brokerage Commissions as Payment  for Order Execution Services or Research (“Soft Dollar” Arrangements)

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the section Securities Law & Policy: Policies & Instruments.