Monday, October 23, 2006

Investment fiduciaries own Best Execution

The DOL asserts that Plan fiduciaries have a duty to ensure “best execution” in the acquisition/disposition of plan assets. They retain the duty of oversight with this standard even if they delegate trading responsibility to their investment managers. Therfore, investment fiduciaries should be aware of regulatory guidance and practice in this area. “Soft dollar” regulation, in particular, has been somewhat nebulous and even contradictory over the years.

When the SEC abolished the fixed commission structure in 1975 , guidance was required to establish the definition of best execution. Section 28(e) of the 1934 Act provided a limited fiduciary safe harbor for brokerage commissions in excess of the amount of commission another broker-dealer would have charged, if a good faith determination indicated that the excess was reasonable in relation to the value of brokerage and research services provided. These excess commission costs for research are referred to as "soft dollars". The DOL has indicated that plan fiduciaries are not covered by this safe harbor if they do not "exercise investment discretion". In addition, the use of "soft dollars" to pay for non-research related services may be a violation of securities laws and or ERISA .

Since the adoption of Section 28(e) in 1975, the SEC has issued three interpretive releases on the subject. The first did not protect ordinary commercial products while the second, issued in 1986 changed positions and invited broad interpretation of the safe harbor coverage. The third release in 2006 provided greater clarity on allowable research & brokerage expenses. Investment fiduciaries should get familiar with this material and implement a formal process to periodically review their plans and investment manager's use of soft dollars and best execution procedures and results.


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