New York, NY – The SEC recently issued a non-action letter in response to a question from Goldman Sachs about whether research providers who participated in their XPRESS Research platform should be registered as brokers to be paid by a pool of client commissions. The end result will allow US fund managers to do exactly what their British colleagues were able to do last year – that is, paying for both brokers and non-brokers from a single pool of commissions. Complexity Management Because of our customer experience, many investment firms do not view the full workflow of commission management as a unique integrated process. Instead, you can have a brokerage voting process in a system, a target setting in a calculation table, effective commission tracking in your settlement function, settling CSA agreements in law and compliance, tracking CSA invoices in the financial sector and checking brokers in the front office. At first glance, this may be the simplest or most practical approach, but it increases the risk because of the greater number of interfaces and manual and tabular processes. The typical solution that can be seen in many institutions is, for example, to rely on the flexibility of spreadsheets and the ingenuity of an employee of each department who has a detailed knowledge of all the rules, characteristics, bells and whistles that, despite all efforts, can slip into these agreements. The reason agents lack the importance of commission-sharing agreements is that the agreement is usually executed automatically by MLS. Each MLS has a provision in its membership rules that requires members to indicate as a sum the amount they pay to another MLS member in a co-op transaction. The result of this rule is that brokers who submit a listing to MLS make a unilateral offer of compensation to all other MLS members. The terms of this offer are indicated in the MLS quote submission for the listing. Of course, there is a huge counter-pressure on the consolidation of MLS.
Real estate remains mainly a local market activity. Maine is the only state to have created a national MLS, and even there, the largest metro area continues to operate its own MLS. In most countries, the consolidation of multiple listings at the regional or metro level has stalled. But more and more agents operate outside the regional and metro borders. If they do, it is absolutely essential that a commission-sharing agreement be negotiated separately.