Research is the foundation of the money management industry. Providing research is one important, long-standing service of the brokerage business. Soft dollar arrangements have developed as a link between the brokerage industry's supply of research and the money management industry's demand for research. Broker-dealers typically provide a bundle of services including research and execution of transactions. The research provided can be either proprietary (created and provided by the broker-dealer, including tangible research products as well as access to analysts and traders) or third-party (created by a third party but provided by the broker-dealer). Because commission dollars pay for the entire bundle of services, the practice of allocating certain of these dollars to pay for the research component has come to be called "softing" or "soft dollars".

Under traditional fiduciary principles, a fiduciary cannot use assets entrusted by clients to benefit itself. As the Commission has recognized, when an adviser uses client commissions to buy research from a broker-dealer, it receives a benefit because it is relieved from the need to produce or pay for the research itself. In addition, when transactions involving soft dollars involve the adviser "paying up" or receiving executions at inferior prices, advisers using soft dollars face a conflict of interest between their need to obtain research and their clients' interest in paying the lowest commission rate available and obtaining the best possible execution.

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Based on the results of the sweep, and our experience over recent years in examining soft dollar practices of advisers, we make the recommendations described below.

A. The Commission Should Reiterate and Provide Additional Guidance With Respect To Soft Dollars

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B. The Commission Should Consider Adopting Recordkeeping Requirements Related to Soft Dollars

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C. The Commission Should Modify Form ADV to Require More Meaningful Soft Dollar Disclosure

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D. The Commission Should Encourage Firms to Adopt Internal Controls Relating to Soft Dollars