Commission Recapture Agreement
The Commission`s recapture companies are opposed to the decline in their global activities as a result of the New Advertising Obligations of the Financial Services Authority (FSA). Brokers and asset managers can argue that clients` wishes for best execution will be better met without the Board`s takeover becoming complicated. Nicholas Pratt asks what that would mean for pension funds… “The CSAs cede control of the executive over the commission as an asset of the fund,” said Todd Burns, President of Lynch, Jones-Ryan. “The difference between the CSAs and the recovery commission is the same as for the soft dollars – the separate execution and search CSAs, but the benefits go to the broker, not the plan.” Mr. Burns pointed out that there was no audit trail and that there was rarely a firm agreement on what happens at the end of each quarter with surplus funds that can remain after research expenditures. Bill Conlin of Abel Noser said, “CSAs are not going to cut costs.” By recovering the commission, the sponsor or fund receives a discount from the broker after the commission has been paid, so that the plan is actually paid only for the execution of the trade, and not for other services, such as research. The plan does this by working with a commission winback broker, who can claim the discount from all brokers in his network of correspondents and then repay the plan (minus a fee of about 25%). The Commission`s main recapitration brokers – Lynch, Jones – Ryan (a subsidiary of Bank of New York), Frank Russell, Abel Noser – have a global reach, with corresponding brokers on stock markets around the world. According to Greenwich Associates, the recovery of commissions in the United States in 2005 amounted to $790 million (613 million euros), or about 7% of equity commissions paid to brokers.
A CSA is an agreement between a plan or its investment manager and a broker, without an external intermediary. The broker items the cost of trading and isolated the amount available for the search to be purchased either by the broker or by a third party. This increases transparency and means that research can be acquired from the best source. However, nothing is returned to the plan and, according to the main brokers in the Commission`s recapture, this is a serious mistake. And significant funds are at stake in the UK – the FSA has estimated research spending at between $105 million and $125 million. Although the takeover of the Commission and the CSAs have unbundled the price of trade, there are significant differences between the two. “On the surface, CSA.s and The Commission are not so different,” says Stephane Loiseau, co-head of e-commerce at Societe Generale.