[1] In a soft dollar arrangement, the investment manager directs commissions generated by a client's or fund's transactions to a broker-dealer or other trading venue.
Prior to May 1, 1975—sometimes referred to as "May Day"—all brokerage firms used a fixed price commission schedule published by the New York Stock Exchange;[7] the schedule was a matrix listing the number of shares in the trade on one axis, the stock's price per share on the other axis, and the corresponding commission charge in the cells of the matrix.
[citation needed] At the same time, the brokerage industry lobbied Congress to allow it to continue to include the cost of investment research given to institutional clients as part of the fully negotiated commission.
Section 28(e) provides a "safe harbor" for any fiduciary that "pays up" from its fully negotiated commission rate to receive qualifying research or brokerage services from its broker(s).
A fiduciary who "pays up" in client commissions to receive non-qualifying services must be able to defend this practice under applicable law.
[11] As a result, for all practical purposes, brokerage arrangements for pension plans and registered investment companies must come within the Section 28(e) safe harbor or run afoul of these restrictions.
Such brokerage arrangements, where favors are traded in exchange for institutional clients' excess commissions have been criticized by securities regulators.
Because institutional funds can trade a significant number of shares every day, the soft dollars add up quickly.
However, many believe that as long as full disclosure is made, clients will gravitate to managers that use an appropriate mix of soft dollar and other arrangements.