====== Section 28(e) ======
Section 28(e) is a provision of the US [[Securities Exchange Act of 1934]]. It's what's known as a "[[safe harbor]]" that allows investment managers to use their clients' commission dollars to pay for "research and brokerage services" from broker-dealers. In simple terms, it lets a fund manager pay a broker a bit more for executing a trade, provided that the broker also gives the manager valuable research that ultimately helps their clients. This is a big deal because, without this rule, paying anything other than the lowest possible commission could be seen as a breach of the manager's [[fiduciary duty]] to act in their clients' best interest. The arrangement where commissions are used to pay for services is often referred to as a [[soft dollars]] arrangement.
===== How Does It Actually Work? =====
At its core, Section 28(e) addresses a fundamental conflict. A fund manager has a duty to get the best possible deal for their clients when buying or selling securities, a principle known as [[best execution]]. This usually means finding the lowest commission fee. However, what if a broker charges a slightly higher commission but also provides brilliant, exclusive research reports that help the manager make much better investment decisions for those same clients? Section 28(e) says this is permissible, as long as the manager determines in good faith that the commission paid is reasonable in relation to the value of the brokerage and research services received. It's a trade-off: a slightly higher execution cost for (supposedly) superior investment insights that benefit the end investor.
===== What Counts as "Research"? The Great Gray Area =====
This is where things get tricky. The US [[Securities and Exchange Commission]] (SEC) has defined what qualifies as legitimate research, but there's still a lot of room for interpretation.
==== Permissible Services ====
Generally, services that help the manager in their investment decision-making process are allowed.
  * Research reports and analyst conference calls
  * Subscriptions to financial publications and data services (like a Bloomberg terminal)
  * Seminars and conferences with substantive content
  * Software used for analyzing investment portfolios
==== Non-Permissible Services ====
Things that are more about running the business than making investment decisions are a no-go.
  * Office rent, furniture, and computer hardware
  * Salaries for the manager's staff
  * General accounting and legal fees
  * Lavish travel and entertainment expenses
The temptation for managers to use client commissions to cover their own operating costs is obvious, which is why this is a hotly debated topic.
===== A Value Investor's Skeptical Eye =====
For a value investor, transparency and aligned incentives are paramount. Section 28(e) can look like a direct threat to both.
==== The Conflict of Interest ====
The core problem is that soft dollar arrangements can incentivize a manager to direct trades not to the broker who offers the best price, but to the one who provides the most "goodies." Are those "goodies" genuinely market-beating research that benefits you, the investor? Or are they just perks that make the manager's life easier, paid for with your money? It creates a classic agency problem where the manager (the agent) might not be acting purely in the interest of the client (the principal). A diligent investor should question whether their fund manager is truly getting value or simply outsourcing their research costs.
==== The European Contrast: MiFID II ====
If you're an investor in Europe, the landscape is dramatically different thanks to a regulation called [[MiFID II]] (Markets in Financial Instruments Directive II), which took effect in 2018. MiFID II effectively dismantled the soft dollar system in the EU by forcing a great "unbundling."
  * **Unbundling:** Asset managers must now pay for research separately from trading commissions. They can either pay for it out of their own company revenues (their Profit & Loss account) or from a dedicated [[Research Payment Account]] (RPA) that is explicitly funded by and agreed upon with their clients.
  * **The Impact:** This has brought massive transparency to the cost of research. Managers now have to justify every euro spent on research, leading to a more competitive and cost-conscious market for investment analysis. Many argue this is a far better system for the end investor, as it removes the hidden conflict of interest inherent in the Section 28(e) model. This transatlantic divide is one of the most significant differences in investment regulation today.