Ruling on Soft Dollar Commission Credits Held at Lehman Brothers
When Lehman Brothers collapsed several years ago, many
institutional investors were surprised to learn that the soft dollar
credit balances they accumulated with the brokerage firm were no
longer available to them.
Since then, many Lehman clients have tried to recoup lost
commission credits, claiming soft dollar credits were client assets,
thus protected by the Securities Investor Protection Act (SIPA) and
SIPC. The investors were seeking "customer" protection under SIPA,
and their claims, if approved, would give them priority over general
creditors of Lehman Brothers.
As a background, the primary purpose of SIPA is to return securities
to investors which are held by a financially troubled broker-dealer.
This is limited to returning actual securities to investors and not the
return of cash. In order for the commission credits to be deemed
"customer" assets under SIPA, Lehman clients would need to prove
that commission credits were cash deposits held at the broker for
the purpose of purchasing securities.
Section 28(e), which governs how client commission credits can be
used, states that commission credits can only be used to purchase
eligible research and brokerage services; they cannot be used to
purchase securities. Since the claimants in the Lehman Brothers
case were seeking the return of their soft dollar credits in cash, it
has been determined that they would not be afforded protection
under SIPA. At best, they were general creditors of Lehman Brothers.
An official Memorandum of Law regarding the Lehman Brothers soft
dollar commission credits case was issued on April 17, 2012.
With the collapse of Lehman Brothers and the subsequent loss of
their clients' soft dollar credits, it has become more important for
institutional investors to conduct proper due diligence to assess
their brokers' financial stability.
Understanding your brokers' financial strength is important in
protecting the commission credits you accumulate. Your brokers
should be open to sharing with you certain financial information
that could provide a sense of security about their financial
soundness. Many documents are either publicly available on a
broker's website or by request. If they are not willing to share that
information, then a red flag should be raised.
For 35 years, CAPIS has operated a conservative business with
extensive risk management processes. CAPIS:
- Holds no long-term debt and funds all of its operating capital internally
- Has net capital 51 times higher than the regulatory requirement
- Invests its capital in short-term investments such as CDs, treasuries, and money market funds
- Does not make risky business decisions that might jeopardize our financial strength
- Has been profitable every year for over 25 years
Commission credits accumulated through the course of executing
securities transactions are not considered assets of the customer
but obligations of the broker to provide research and brokerage
services as applicable under Section 28(e). As such, the recent
Memorandum of Law issued by SIPC concludes that soft dollar
commission credits are not considered "customer" assets and are
therefore not protected by SIPA or the SIPC.
Open the Memorandum