1.  Because Soft Dollar Arrangements may impact the evaluation of best execution, a Hedge Fund Manager, if applicable to its operations and trading activities, should make determinations regarding its Soft Dollar Arrangements and should develop policies relating to the use of these arrangements.

1. If a Hedge Fund Manager uses Soft Dollar Arrangements, its policies should include procedures and documentation requirements for third party arrangements with brokers and other counterparties.

In making determinations and policies, a Hedge Fund Manager should consider arrangements relating to transactions in instruments other than securities. Applicable laws, rules, or regulations can also guide a Hedge Fund Manager’s determinations and policies. For example, if the Hedge Fund Manager has operations in the United Kingdom, it should consider any FSA consultation papers on the subject. Additionally, if the Hedge Fund Manager is subject to ERISA, it should ensure its arrangements do not violate ERISA.

Policies may also vary depending on a Hedge Fund Manager’s customized advisory arrangements. Policies may include, depending on the nature of the Hedge Fund Manager’s business:

• commission sharing arrangements and proprietary arrangements addressing, as appropriate approved broker-dealers and products/services;
• reliance or non-reliance on the safe harbour of Section 28(e); and (3) procedures for approval of such arrangements and related terms.

A Hedge Fund Manager should make a good faith determination that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the broker-dealer and in light of the terms of the particular transaction or the Hedge Fund Manager’s overall responsibilities with respect to its discretionary accounts.

A Hedge Fund Manager relying on the safe harbor provided by Section 28(e) should determine whether the brokerage and research services are covered within the safe harbor (as set forth in Section 28(e)(3)). The SEC indicates that “the focus should be on whether the product or service provides lawful and appropriate assistance to the money manager in the carrying out of his responsibilities.”

A Hedge Fund Manager with Soft Dollar Arrangements that fall outside of the safe harbor provided by Section 28(e) should ensure that its arrangements are consistent with its duties to investors and determine whether the products and services received fall within the disclosed usage of Soft Dollar Arrangements. (See Section 2 - Responsibilities to Investors, Recommendation 2.13).

2.  A Hedge Fund Manager should evaluate the types of products and services subject to its Soft Dollar Arrangements.

2.  As part of its evaluation, a Hedge Fund Manager should determine the extent to which products or services have research functions or are developed by a third party and provided by a broker. A Hedge Fund Manager relying on Section 28(e) should make proper allocation of products or services with mixed uses (i.e., computer hardware that assists an adviser in research functions and in non-research functions) so that non-research services are paid for from the Hedge Fund Manager’s funds. Certain arrangements, such as commission sharing arrangements, can assist a Hedge Fund Manager in obtaining best execution by allowing it to use the broker providing best execution to execute the trade and to pay commissions to other brokers from whom it receives research or services through Soft Dollar Arrangements.

The SEC’s “Guidance Regarding Client Commission Practices Under Section 28 (e)” (www.sec.gov/rules/interp/2006/34-54165.pdf) provides steps for analyzing:

• whether a particular product or service is an eligible research or brokerage service within the specific statutory limits of the safe harbor;
• whether the product or service actually provides lawful and appropriate assistance in the performance of an adviser’s investment decision-making responsibilities, including the appropriate treatment of “mixed-use” items; and
• whether the amount of client commissions paid is reasonable in light of the value of the products or services provided by the broker-dealer.

The release also discusses third party research and the permissibility of client commission arrangements under the safe harbor.

Additional guidance can be found in the FSA’s Consultation Paper on Bundled Brokerage and Soft Commission Arrangements (www.fsa.gov.uk/pubs/cp/cp176.pdf). This publication makes two main proposals:

• that goods and services that are reasonably anticipated should be excluded from those that can be purchased with commission, whether under soft or bundled arrangements (and the document sets out the goods and services to which this restriction should apply); and
• where a Hedge Fund Manager buys any other services additional to trade execution with its customers’ commission, it should determine the cost of those services and rebate an equivalent amount to its customers’ funds.

3.  A Hedge Fund Manager should disclose its use of Soft Dollar Arrangements to existing and potential investors in each Hedge Fund it manages. This disclosure should be made prior to engaging in such arrangements and should disclose the Hedge Fund Manager’s policies with respect to these arrangements.

3.  Disclosure of Soft Dollar Arrangements may include:

• whether the Hedge Fund Manager’s use of the products and services provided by a broker pursuant to Soft Dollar Arrangements does not exclusively benefit the Hedge Fund whose trades generate the relevant brokerage commissions or fees;
• the types of products and services that may be received through Soft Dollar Arrangements in an appropriate level of detail, and whether the use of Soft Dollar Arrangements falls within the safe harbor of Section 28(e) of the Securities Exchange Act of 1934, as amended. (For guidance on a Hedge Fund Manager’s determinations and policies relating to Soft Dollar Arrangements, see Section 6 - Trading Relationship Management, Monitoring, and Disclosure, Recommendations 6.8 and 6.9.)

4.  A Hedge Fund Manager should establish and maintain policies relating to gifts and entertainment, and other payment or receipt of money or property from any person in a non-business capacity that may create the appearance of impropriety to Hedge Fund investors.

4.  No applicable guidance.