Soft Dollars: Section 28(e) (Exchange Act)

To meet the soft dollars: section 28(e) (exchange act) requirement, you must only pay commissions above the lowest available rate when, in good faith, you determine the commission is reasonable relative to the brokerage and research services received, and you can prove that determination with contemporaneous documentation. Build a repeatable review, approval, and recordkeeping process tied to trading and research spend. (15 U.S.C. 78bb(e))

Key takeaways:

• Section 28(e) is a conditional safe harbor, not a blanket permission, for paying up for brokerage when you receive eligible brokerage and research. (15 U.S.C. 78bb(e))
• Your control objective is evidentiary: demonstrate “good faith” and “reasonable in relation to” through a documented decision process, not after-the-fact narratives. (15 U.S.C. 78bb(e))
• Exams commonly focus on conflicts, disclosure consistency, and whether you can map soft-dollar benefits to the accounts generating commissions. (2025-exam-priorities)

Soft dollar practices sit at the intersection of best execution, conflicts management, and disclosure hygiene. Section 28(e) of the Securities Exchange Act provides a limited safe harbor: an adviser (or other person exercising investment discretion) is not deemed to have acted unlawfully solely because a client account paid higher commissions than another available rate, if the adviser makes a good-faith determination that the commission is reasonable in relation to the brokerage and research services provided. (15 U.S.C. 78bb(e))

For a CCO or GRC lead, the fastest path to operationalization is to treat 28(e) like a control standard with three required outcomes: (1) define what your firm treats as “brokerage and research services” in practice, (2) implement a governance workflow that forces a pre-trade or periodic “good faith” reasonableness determination, and (3) retain artifacts that allow an examiner to re-perform the determination using what you knew at the time. (15 U.S.C. 78bb(e); 2025-exam-priorities)

This page translates the statutory requirement into an implementable operating model: roles, steps, evidence, exam questions, and a practical execution plan you can assign tomorrow.

Regulatory text

Statutory safe harbor (excerpt): “No person exercising investment discretion shall be deemed to have acted unlawfully solely because the account paid a commission in excess of another available amount if the person determines in good faith that the commission is reasonable in relation to brokerage and research services provided.” (15 U.S.C. 78bb(e))

What the operator must do

You must be able to show, for the broker relationships and commission levels you approve, that:

1. A person exercising investment discretion made a determination (not “the firm generally believes”).
2. The determination was in good faith (made honestly, based on a process and facts available at the time). (15 U.S.C. 78bb(e))
3. Commissions are reasonable in relation to brokerage and research services provided (you evaluated what you received and why paying that rate made sense). (15 U.S.C. 78bb(e))

Put differently: if you pay up for execution, access, or research, your file must explain why that spend was justified relative to what your clients received.

Plain-English interpretation of the requirement

Section 28(e) does not require you to use soft dollars. It conditions a safe harbor if you do. Operationally, you are trying to avoid two failure modes:

• Paying higher commissions with no disciplined link to eligible benefits (can’t show “reasonable in relation to”).
• Treating soft-dollar arrangements as informal perks (no consistent, reviewable “good faith” process). (15 U.S.C. 78bb(e))

A strong program makes the reasonableness determination routine: you define eligible categories, track what you receive from brokers, review rates and services on a cadence, and document approvals with enough detail that someone outside the business can understand the decision.

Who it applies to (entity and operational context)

This requirement applies when your firm exercises investment discretion and a client account pays commissions that could be higher than other available commission rates, and you receive brokerage and/or research services in connection with those commissions. (15 U.S.C. 78bb(e))

Typical in-scope contexts:

• Advisers allocating order flow among broker-dealers where commission rates differ.
• Trading desks receiving research, analytics, market data, or corporate access tied to commission arrangements.
• Operations/finance teams booking soft-dollar expenses or tracking commission spend.
• Compliance supervising best execution, conflicts, and disclosures that describe brokerage practices. (15 U.S.C. 78bb(e); 2025-exam-priorities)

Out of scope in practice (but confirm with counsel): firms with no commission-paying accounts, no soft-dollar practices, or purely hard-dollar research spend not tied to commissions.

What you actually need to do (step-by-step)

1) Establish ownership and a policy boundary

Assign accountable owners:

• Business owner: Head of Trading (execution + broker relationships)
• Control owner: CCO (policy, surveillance, disclosure consistency)
• Support: Finance/Operations (commission reporting), Legal (contract terms)

Publish a Soft Dollars / Section 28(e) policy that states:

• The firm will only rely on the safe harbor when it makes and documents a good-faith reasonableness determination. (15 U.S.C. 78bb(e))
• The categories of services the firm treats as “brokerage and research services” for internal approvals (use a controlled list).
• What is prohibited (e.g., anything not on the controlled list unless pre-approved by Compliance/Legal).

2) Build an inventory of broker relationships and benefits received

Create a single register that ties together:

• Broker-dealer name and relationship owner
• Commission schedules / rate cards and any tiering
• Description of brokerage and research services provided under the relationship
• How the service is accessed (platform, reports, calls, meetings)
• Which teams use it and for what investment decision purpose (high level)

This inventory becomes the backbone of your “reasonable in relation to” analysis. (15 U.S.C. 78bb(e))

3) Implement a “good faith reasonableness” determination workflow

Make the determination repeatable and reviewable. A practical workflow:

1. Pre-approval (new broker or new service):

   • Trading proposes broker + expected commission range.
   • Business sponsor describes expected brokerage/research value and intended users.
   • Compliance reviews for conflicts/disclosure alignment and confirms documentation completeness.
   • Approver (e.g., Head of Trading + CCO) signs off that commissions are reasonable in relation to services. (15 U.S.C. 78bb(e))

2. Periodic review (existing relationships):

   • Refresh the inventory with what was actually received.
   • Re-assess commission competitiveness and execution quality factors (qualitative is acceptable if documented).
   • Confirm continued reasonableness determination and document any remediation actions (rate renegotiation, broker removal, service termination). (15 U.S.C. 78bb(e); 2025-exam-priorities)

3. Event-driven review triggers:

   • Material increase in commission rates
   • New research/service categories added
   • Significant changes in trading volume or strategy
   • Compliance findings, complaints, or disclosure updates

4) Tie soft-dollar benefits back to accounts and allocation logic (as applicable)

Examiners often probe whether clients paying commissions are the clients benefiting. Your process should be able to explain:

• How order flow is allocated among brokers (and who approves changes).
• How the firm evaluates broker services alongside execution considerations.
• How the firm addresses potential cross-subsidization concerns (document your rationale, even if the approach is qualitative). (15 U.S.C. 78bb(e); 2025-exam-priorities)

5) Align disclosures and training to actual practice

Ensure your client disclosures (ADV and client communications, as applicable) match your operational reality:

• If you describe receiving research for commissions, your inventory and approvals should evidence it.
• If you claim a best execution process considers certain factors, your broker review materials should reflect them. (2025-exam-priorities)

Train trading, research, and finance staff on:

• What services are eligible for approval under your policy list.
• The escalation path for anything ambiguous.
• The documentation standard: “If it isn’t written down contemporaneously, it didn’t happen.”

6) Recordkeeping: design for re-performance

Organize evidence so a reviewer can re-perform the determination for a sample broker relationship:

• What services were received?
• Who used them and why?
• What commissions were paid (and how that compared to alternatives)?
• Who approved the relationship and on what basis?
• What monitoring occurred and what changed over time? (15 U.S.C. 78bb(e))

Daydream (practically) helps by turning these steps into assigned controls with evidence requests, standardized templates, and an audit-ready trail that stays current as brokers and services change.

Required evidence and artifacts to retain

Maintain an audit package per broker relationship (or per review cycle) with:

• Soft Dollars / Section 28(e) policy and controlled service category list. (15 U.S.C. 78bb(e))
• Broker inventory entry and service descriptions.
• Commission rate schedules and any amendments.
• Written “good faith reasonableness” approval memo or form, signed/dated. (15 U.S.C. 78bb(e))
• Periodic broker review materials (agendas, minutes, scorecards, decision notes).
• Samples of research deliverables or access logs (where feasible) showing services were actually provided.
• Trade/commission reports that support the review period analysis (source system extracts are fine if controlled).
• Disclosure mapping: where the practice is described and the internal owner attestation that disclosure matches practice. (2025-exam-priorities)
• Training records for in-scope staff.

Common exam/audit questions and hangups

Expect questions like:

• “Show me how you determined commissions were reasonable in relation to brokerage and research services for Broker X.” (15 U.S.C. 78bb(e))
• “Who makes the good-faith determination and when is it made?” (15 U.S.C. 78bb(e))
• “What services are you paying for with commissions, and where is that documented?”
• “How do you monitor that the services were actually delivered?”
• “Do your disclosures match your practices, and how do you test that?” (2025-exam-priorities)
• “How do you address conflicts from directing order flow to brokers providing research?” (2025-exam-priorities)

Hangups that slow exams:

• Vague descriptions like “research support” with no specifics.
• Approvals written after an exam request.
• No evidence that anyone revisited reasonableness after material changes. (15 U.S.C. 78bb(e))

Frequent implementation mistakes and how to avoid them

1. Mistake: Treating 28(e) as a checkbox in best execution.
   Fix: Create a standalone soft-dollar workflow and evidence set that connects to, but does not disappear into, best execution files. (15 U.S.C. 78bb(e))

2. Mistake: No controlled taxonomy of allowable services.
   Fix: Maintain an approved list and require Compliance sign-off to add categories.

3. Mistake: Confusing “we received something” with “it was reasonable.”
   Fix: Add a reasonableness narrative: what was received, who used it, why the commission level made sense compared to alternatives. (15 U.S.C. 78bb(e))

4. Mistake: Finance/trading data exists, but Compliance can’t reproduce it.
   Fix: Define standard reports and storage locations; test retrieval quarterly.

5. Mistake: Disclosures drift.
   Fix: Run an annual disclosure-to-process mapping and require Trading attestation that descriptions still reflect reality. (2025-exam-priorities)

Enforcement context and risk implications

No public enforcement cases were provided in the source catalog for this requirement, so this page does not list specific actions.

Risk still materializes in predictable ways:

• Regulatory: Loss of safe-harbor defensibility if you cannot evidence good faith and reasonableness. (15 U.S.C. 78bb(e))
• Fiduciary/conflicts: Soft-dollar arrangements can heighten conflict scrutiny, particularly if broker selection appears driven by benefits rather than execution outcomes. (2025-exam-priorities)
• Reputational/client: Poor documentation can look like hidden compensation even when intent was legitimate.

Practical execution plan (30/60/90)

Exact day counts are less important than sequencing; use this phased plan.

First 30 days (Immediate stabilization)

• Name owners (Trading, Compliance, Finance) and publish a draft 28(e) policy tied to the statutory standard. (15 U.S.C. 78bb(e))
• Build the broker/services inventory from existing broker lists and research subscriptions.
• Identify where commission and trade data lives and define the standard extracts you will preserve for reviews.

Next 60 days (Operationalize controls)

• Launch the approval workflow for new brokers/services and backfill approvals for current relationships.
• Create the review pack template: commission schedule, services received, users, reasonableness sign-off, disclosure check.
• Train in-scope staff and set escalation rules for ambiguous services. (15 U.S.C. 78bb(e))

Next 90 days (Prove operation and audit readiness)

• Run the first periodic broker review cycle and document decisions and follow-ups.
• Perform a self-test: pick a broker, recreate the good-faith reasonableness determination from your artifacts, and fix gaps.
• Validate disclosure alignment against your inventory and actual practices; document sign-offs. (2025-exam-priorities)

Frequently Asked Questions

Do we have to pay the lowest commission rate to comply with Section 28(e)?

No. The safe harbor anticipates commissions “in excess of another available amount” if you determine in good faith they are reasonable relative to brokerage and research services. (15 U.S.C. 78bb(e))

What does “good faith” mean operationally?

It means a real decision by an accountable person, based on information available at the time, documented in a way a reviewer can understand and re-perform. A signed approval memo plus supporting materials is the usual baseline. (15 U.S.C. 78bb(e))

How detailed does our “reasonable in relation to” analysis need to be?

Detailed enough to connect (a) commission levels and routing to (b) specific brokerage/research services received and (c) why paying that rate made sense. Avoid generic statements like “value-add research” without examples. (15 U.S.C. 78bb(e))

Can we document this once a year and call it done?

You need a periodic review cadence that matches how quickly broker services, commission rates, and trading patterns change. Also add event-driven triggers for material changes so you can show the determination stayed current. (15 U.S.C. 78bb(e))

What will SEC exam staff ask us for first?

Expect requests for broker lists, commission data, soft-dollar/research arrangements, your review/approval documentation, and how disclosures align to practice. Exam priorities emphasize conflicts and consistency between what you say and what you do. (2025-exam-priorities)

How can a GRC team make this auditable without slowing Trading?

Standardize templates and evidence locations, then make Trading responsible for business narratives while Compliance validates completeness and disclosure consistency. Tools like Daydream help by automating evidence requests and maintaining an audit trail across review cycles.