For years, regulators on both sides of the Atlantic have struggled to codify rules and guidelines relating to soft dollars. The Securities and Exchange Commission and the U.K.'s Financial Services Authority (FSA) have long sought to eliminate the conflicts of interest that can arise when firms use broker-provided services, such as research and trading tools, in exchange for order flow--and the higher commission structures that cover the cost of these services. For regulators, the challenge is how to balance a firm's fiduciary responsibility to pursue best execution with the practice of "paying up" for legitimate services that a firm believes will enhance its overall performance.
In 2006, both the SEC and FSA established rules and guidelines to address the problem. The SEC provided an interpretative release, offering guidance for complying with Section 28(e) of the Securities and Exchange Act of 1934, which deals with client commission practices. This followed on the heels of the FSA's adoption of final rules on soft commission and bundling disclosure, outlined in CP176 and formally adopted under FSA 05/9.
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