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News January 22, 2007 Issue

Research Providers in Commission Pooling Arrangements Not Necessarily Brokers

The staff of the SECís Division of Market Regulation has issued a no-action letter dealing with the status of service providers that provide research via those new-fangled commission pooling arrangements weíve been hearing about.

In a January 17 letter, issued to Morgan Lewis partner Steven Stone, who wrote in on behalf of Goldman, Sachs, the staff said that it would not recommend enforcement action if a service provider participating in Goldmanís Research XPRESS program receives payment out of the pool for 28(e)-eligible research services without registering as a broker-dealer. A few notes:

  • The staff noted that the adviser is responsible for determining the value of the research, although it may base that determination on input from the service provider.
  • Goldman is not involved in determining the value of the research to the adviser.
  • The service provider is paid out of the commission pool which, per the agreement between Goldman and the adviser, is set aside for obtaining research.
  • The service providerís payment would not be conditioned on the execution of any particular transactions of securities described or analyzed in the research.
  • Aside from providing research, the service provider would not perform other functions "typically characteristic of broker-dealer activity."