IOSCO consultation on soft commission arrangements

28 November 2006

IOSCO issued a consultation paper which sets forth an assessment of the key issues identified on the treatment of soft commission arrangements.

Soft commission arrangements present conflicts between the interests of a CIS operator and the CIS and its investors. In particular, the CIS operator receives goods and services from the broker-dealer that the CIS operator does not have to pay for itself.

Soft commission arrangements provide incentives for CIS operators to direct CIS brokerage based on the benefits provided to the operators, rather than focusing on the most favorable execution for the CIS, potentially resulting in higher overall client costs and, consequently, lower performance.

The use of soft commission arrangements also may disfavor the use of Electronic Communication Networks and other alternative trading systems, by providing incentives to operators to use systems offering soft commission arrangements, even if the execution quality is not as good.

The amount of money involved in soft commission arrangements is quite high, and the conflicts of interest for CIS operators is readily evident. Given the importance of soft commissions, and the conflicts of interests they present, some jurisdictions currently are reviewing the regulation of soft commission arrangements.

IOSCO therefore requests comments in particular on the following issues :

  • What are the conflicts of interest associated with soft commission arrangements?
  • How do you manage those conflicts of interest?
  • Do you agree with the TC´s analysis of those conflicts in this paper?

    Deadline for comments is 15 March 2007.

    Full paper

    © IOSCO