April 7, 1993
TO: SEC RULES COMMITTEE NO. 33-93
RE: RECEIPT OF SOFT DOLLAR CREDITS FROM UNDERWRITING CONCESSIONS
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A member of the Committee recently raised an issue
regarding the propriety of an investment adviser receiving soft
dollar credits from underwriting concessions paid to broker-
dealers in connection with the purchase of shares by mutual funds
in a fixed price offering. Attached is a letter from the member
on the subject.
In a fixed price offering, underwriting purchases are
generally effected as principal trades, and members of the
syndicate are paid a selling concession for the shares sold
(which is included in the fixed price). This offering process at
one fixed price is required under Section 24 of the NASD Rules of
Fair Practice, which has been interpreted to permit a member to
provide bona fide research in return for selling concessions from
purchases in fixed price offerings.
While it is clear that the use of soft dollars for
underwriting concessions is permitted under the NASD Rules of
Fair Practice, it is not clear whether it would be permissible
under the federal securities laws. Section 28(e) of the Exchange
Act provides a safe harbor for certain soft dollar arrangements.
The SEC has taken the position that Section 28(e) is not
applicable to principal trades conducted in the secondary market.
However, the SEC has never addressed the issue of whether
purchases in a fixed price offering are protected under Section
28(e).
It is also unclear whether the use of soft dollars for
underwriting concessions would be prohibited under Section
17(e)(1) of the 1940 Act, which prohibits an affiliated person of
a fund, acting as an agent, from receiving any compensation for
the purchase or sale of any property to or from the fund, except
in certain situations that are not relevant for these purposes.
In an interpretive release on Section 28(e), the SEC stated that
receipt of compensation by a fund's adviser pursuant to a soft
dollar arrangement in connection with the purchase or sale of any
securities to or from the fund arguably would violate Section
17(e)(1). However, if the receipt of such compensation is within
the safe harbor of Section 28(e), the prohibition of Section
17(e)(1) would not apply.
We will discuss the propriety of receiving soft dollar
credits from underwriting concessions under the federal
securities laws at the April 22nd SEC Rules Committee meeting.
Amy B.R. Lancellotta
Associate Counsel
Attachment