Hedge Fund Alert: SEC Issues New Soft Dollar Guidance

On July 12, 2006, the SEC issued new interpretative guidance on the scope of permissible commission practices under Section 28(e) of the Securities Exchange Act of 1934. Section 28(e) provides a "safe harbor" for advisors pay higher than the lowest available commission rates in return for brokerage and research services.

With some exceptions, the new guidance from the SEC will not alter most of the existing practices for most hedge fund managers, traditional investment advisors, or brokers. Nevertheless, there are aspects of the new analysis that merit attention. Each of these items is discussed below, but in summary they are: the requirement that all research reflect intellectual content; the elimination of mass-marked publications and tangible goods, such as computer hardware, from the definition of research; the announcement of new "temporal standards for measuring brokerage; and the incorporation of a new standard of liability for brokers making payment