What is the basis of soft dollars or, as they are known today, client commission arrangements?
Prior to 1975, commission rates charged by broker-dealers for research and execution services were fixed. In 1975, the Securities and Exchange Commission (SEC) abolished fixed commission rates. With the end of fixed commissions, investment managers were concerned that they might be viewed as breaching a fiduciary duty by causing their clients to pay more than the lowest available commission rate. As a result, Congress created a safe harbor provision in Section 28(e) of the Securities Exchange Act of 1934 that protects investment managers from claims that they breached their fiduciary duty by causing clients to pay more than the lowest available commission rates in exchange for research and execution. In July 2006, the SEC published an interpretive release addressing the scope of brokerage and research services and client commission arrangements under Section 28(e).
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