The Canadian Securities Administrators are publishing for comment a proposed new rule dealing with “soft dollar” commissions that sets out acceptable uses of soft dollar commissions and requires improved disclosure.

The proposed rule provides a specific framework for the use of client brokerage commissions by advisors, the CSA says. “It clarifies the broad characteristics of the goods and services that may be acquired with these commissions and also prescribes the advisors’ disclosure obligations when using brokerage commissions as payment for these goods and services,” the CSA explains.

The rule indicates that advisors can only use brokerage commissions as payment for goods and services that are considered order execution services or research. It also reinforces the overriding requirement that advisors must act in the best interests of their clients by ensuring that: the order execution services or research paid for with client commissions benefit the clients; the research received adds value to investment or trading decisions; and, the brokerage commissions paid are reasonable in relation to the value of goods and services received. Items that aren’t available for soft dollar payments include seminars and mass-marketed or publicly-available information or publications.

The proposed rule does not restrict a dealer from forwarding commissions to a third party, on the instructions of an adviser, to pay for order execution or research provided to the adviser by that third party. “We believe such practices should be permitted in order to provide flexibility and promote the use of independent research,” the CSA says.

Also, the CSA would require disclosure of soft dollar practices to clients on an initial basis, and at least annually.

An accompanying cost-benefit analysis estimates that the proposed rule will cost about $3 million (a one-time expense) to implement – about $2,800 per firm, primarily to enhance disclosure – “but the benefits are expected to be substantial”.

“Our analysis suggests that a national instrument that provides better guidance on the use of soft dollars and that mandates disclosure to investors is the best option,” it says. “It will manage the inherent conflicts of interest without affecting the viability of independent research providers and provide stakeholders more certainty about the acceptable uses of soft dollar commissions. By introducing requirements for more meaningful, consistent and comparable disclosure, the proposed instrument will enable investors to make more informed decisions about advisors and to better monitor their use of soft dollar arrangements.”