To elaborate on my comment letter of October 21, 2005, I would like to point out that when Section 28e was passed by the Congress, there were still fixed commission rates. The Section was inserted because the Congress was persuaded by many in the broker-dealer community they might “throw the baby out with the bath water” if research dried up when commissions became competitive.
Soft dollars had become ubiquitous because the fixed commission rates were extremely high, and broker-dealers would promise to give their large customers almost any service or favor to provide a de facto discount, although not permitted under NYSE rules.
They knew that when commissions were unfixed there would be a reduction in commissions, but were unsure how much they would decline. The prospect of charging just for execution services was too frightening to bear, and the quest for exceptions was made a first priority by many broker-dealers.
The lobbying and testimony were effective, and Section 28e found its way into the legislation.
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