Directed Brokerage Program Glossary
Glossary of acronyms used in this report.
A trade in which the broker acts as agent and executes a buy or sell for a customer. A commission is charged for the service.
The role of a broker/dealer firm when it acts as an intermediary between its customer and another customer. For this service, the broker receives a commission.
Refers to executing client transactions so that the client’s total cost is the most favorable under the particular circumstances at that time.
An agreement between an issuer of bonds and a trustee, on behalf of the bondholder, setting forth the terms of the bonds.
Noncancellable insurance purchased by the issuer from a monoline bond insurer pursuant to which the insurer promises to make scheduled payments of interest and principal on a bond issue if the issuer/obligor fails to make timely payments. When the bond issue is insured, the investor relies upon the creditworthiness of the insurer rather than the issuer.
Refers to a person or entity registered with the National Association of Security Dealers and provides investment services (research, soft dollars, etc.) and/or execution services.
Refers to the amount on any trade retained by a broker to be used directly or indirectly as payment for execution services and, when applicable, research supplied to the investment adviser or its client in connection with soft dollar arrangements or for benefits provided to the client in client-directed brokerage arrangements. For these purposes, trades may be conducted on an agency or principal basis.
Refers to an arrangement whereby a broker provides services or products in addition to execution. Brokerage arrangements include investment adviser directed and client directed brokerage arrangements.
Brokerage and Research Services
Refers to services and/or products provided by a broker to an investment adviser through a Brokerage Arrangement, including trade execution; the furnishing of relevant advice relating to the purchasing and selling of securities; analysis and reports relating to relevant market information; and the performance of incidental functions such as clearance, settlement and custody.
Refers to the entity, including a natural person, investment fund or separate account designated to receive the benefits, including income, from the brokerage generated through securities transactions. A client may be represented by a trustee or other fiduciary who may or may not have investment discretion.
Client-Directed Brokerage Arrangement
Refers to an arrangement whereby a client directs that trades, for its account, be executed through a specific broker in exchange for which the client receives a benefit in addition to execution services. Client-directed brokerage arrangements include rebates, commission banking and commission recapture programs through which the broker provides the client with cash or services, or pays certain obligations of the client. A client may also direct the use of limited lists of brokers; not for the purpose of reducing brokerage costs, but to affect various other goals (e.g., increased diversity by using minority-owned brokers) or geographical concentration.
Refers to the amount paid to the broker in addition to the price of the security and applicable regulatory fees on an agency trade.
Directed Brokerage Credits
Refers to credits created by trading with certain broker/dealer firms. Imbedded within the cost of the trade, similar to airline mileage programs, directed brokerage credits are offered by brokerage firms to encourage trading with their respective firm. The credits are considered plan assets of the plan sponsor and can be used by either the investment manager or the plan sponsor. The SEC governs how investment managers can use the credits. Plan sponsors can use the credits for various services and can request rebates with firms.
Refers to any entity, or a natural person, including a CFA Institute member, that has discretionary authority or responsibility for the management of a client’s assets or other relationships of special trust.
A term that refers to actual cash. The antonym to soft dollars which refers to intangible credits.
Refers to any entity or natural person that serves in the capacity of asset adviser to a client. The investment adviser may have sole, shared or no investment discretion over an account.
Investment Decision-Making Process
Refers to quantitative and qualitative processes and related tools used by an investment adviser in rendering investment advice to its clients, including: financial analysis, trading and risk analysis, securities selection, broker selection, asset allocation and suitability analysis.
Refers to the sole or shared authority (whether or not exercised) to determine what securities or other assets to purchase or sell on behalf of a client.
Refers to services and/or products provided to an investment adviser by a broker, through a brokerage arrangement, that have the capacity to be used for both the investment decision-making process and management of the investment firm.
A trade in which the broker acts on his own behalf and buys or sells for a customer.
Proprietary Research Arrangement
Refers to an arrangement whereby the investment adviser directs a broker to affect securities transactions for client accounts in exchange for which the investment adviser receives research from, and/or access to, the “in-house” staff of the brokerage firms.
Provided by a Broker
Refers to (i) in proprietary research arrangements, research developed by the broker, and (ii) in third-party research arrangements, research for which the obligation to pay is between the broker and third-party research provider, not between the investment adviser and third-party research provider.
Represents the number of commission dollars to cash (hard dollars) required to purchase services. Example: if a service cost $100 in cash, at a ratio of 1.8:1, the commission (soft dollar) cost would be $180 or 1.8 x 100 = $180.
Refers to services and/or products provided by a broker, the primary content of which must, if used by the investment adviser, directly assist the investment adviser in its investment decision-making process and not in the management of the investment firm.
Section 28(e) Safe Harbor
Refers to the “safe harbor” set forth in Section 28(e) of the U.S. Securities Exchange Act of 1934, which provides that an investment adviser that has investment discretion over a client account is not in breach of its fiduciary duty when paying more than the lowest commission rate available if it determines in good faith that the rate paid is commensurate with the value of brokerage and research services provided by the broker.
Refers to any transactions involving a broker, whether conducted on an agency basis or principal basis.
Refers to directed brokerage credits created and used by an investment manager rather than a plan sponsor. The use of soft dollars by investment managers is only allowable under the SEC Section 28(e) safe harbor requirements. The term and use of soft dollars has created controversy and criminal actions within the investment management industry as some managers used the client’s credits for services beyond the SEC safe harbor limits. Brokerage credits used by a plan sponsor such as CalSTRS are considered plan assets and therefore called directed brokerage.
Soft Dollar Arrangement
Refers to an arrangement whereby the investment adviser directs transactions to a broker in exchange for which the broker provides brokerage and research services to the investment adviser. Soft dollar arrangements include proprietary and third-party research arrangements but do not include client-directed brokerage arrangements. Soft dollar arrangements are sometimes referred to herein as investment adviser-directed brokerage arrangements.
Third-Party Research Arrangement
Refers to an arrangement whereby the investment adviser directs a broker to affect securities transactions for client accounts in exchange for which the investment adviser receives research provided by the broker, which has been generated by an entity other than the executing broker.