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News August 22, 2005 Issue

Soft Dollars: Some Firms Use Them and Don’t Even Know!

Newsflash: If your firm sends client trades through a full-service brokerage firm and receives proprietary research (a.k.a. Street research), your firm is receiving soft dollars and needs to answer Item 8.E. of Form ADV "yes." Thatís the item that asks whether "you or any related person receive research or other products or services other than execution from a broker-dealer or a third party in connection with client securities transactions."

A recent NRS-IAA report found that 42 percent of advisers answered that item "no." The reportís authors said they were "skeptical" of that result: "We suspect that many advisers may not consider receipt of bundled proprietary products to require an affirmative answer" to Item 8.E. "If the SEC is interested in more accurate information regarding the use of soft dollars, it should, we respectfully submit, consider substituting a more precise question, adding an instruction to the Form, or providing additional guidance to advisers."

And thatís exactly what the SEC staff did. A new Q&A added earlier this month to the IARD website reads as follows:

Q: "My advisory firm receives research from broker-dealers that execute our clientsí securities transactions. We do not, however, use client brokerage to obtain research produced by third parties ó all the research we receive is proprietary research produced by the executing broker-dealers. Should I answer ĎYesí to Item 8.E?"

A: "Yes," said the SEC staff, noting that "the source of the research, i.e., whether it is produced by a third party or the executing broker, does not determine your answer to Item 8.E."

Robert Plaze, an associate director in the SECís Division of Investment Management, acknowledged that the Q&A was prompted by the NRS-IAA report.

He also said that the IARD system also will be adding a "completeness check" for the CCO name ó another issue identified in the NRS-IAA report. "That space has to be occupied," said Plaze, or the form will be kicked back.