Brokers receive greater leeway on commissions

The Securities and Exchange Commission loosened rules for how brokers can share stock-trading commissions with non-brokers, a decision that may enable Wall Street’s largest firms to keep more revenue.

The SEC’s Division of Market Regulation told Goldman Sachs Group Inc. it could share investors’ trading commissions with non-brokers without fear of sanctions. The regulator’s so-called no-action letter, written to explain an agency policy, was posted on its website Jan. 24.

Trading commissions have traditionally underwritten equity research that is provided for investors. Investors usually direct at least some trades to small-scale brokers in order to get broader spectrum of opinion. A July SEC ruling on commission-sharing enabled investors to reduce the number of brokers they deal with while continuing to fund other firms’ research.

“This will increase the popularity of these agreements,” said Sanford Bragg, president of Integrity Research Associates, a consulting firm. “Money managers will continue to consolidate their trading, putting pressure on second- and third-tier firms and benefiting the 12 or so largest trading firms.”

The no-action letter was prompted by a Goldman inquiry about whether the SEC would investigate firms that use its Research XPRESS software to pay non-brokers. It clarifies that one commission-sharing agreement can apply to other parties, Bragg said.