FINRA Fines Mini-Prime for Soft Dollar Practices
Thursday, November 26, 2009 : PermalinkNew York (HedgeCo.net) – The Financial Industry Regulatory Authority, which oversees broker-dealers, sanctioned and fined Terra Nova Financial, a mini-prime broker, and some of its employees for making improper soft dollar payments on behalf of hedge fund managers. FINRA found that the broker’s policies, procedures and systems were inadequate and that the broker had failed to comply with those policies it did have in place. Among other things, FINRA cited non-compliance with soft dollar disclosures in the hedge fund managers’ documents.
The SEC has not yet commented or brought charges against the hedge fund managers. It is important to note, however, that the SEC maintains “fraud” jurisdiction over all investment managers, whether or not registered, under Section 206 of the Investment Advisers Act of 1940. Inadequate disclosures, including disclosures of soft dollar practices, and non-compliance with one’s disclosed policies and procedures potentially qualify as “fraudulent, deceptive, or manipulative” practices under Section 206.
An investment fund or its manager is said to have used a fund’s “soft dollars” for payment for services and products when that fund’s broker-dealer provides the fund or its manager with services or products in addition to transaction execution or pays for those services and products for the fund or its investment manager. Using fund soft dollars to pay for services and products does not necessarily constitute a violation of any law or fiduciary duty. However, soft dollar practices must be fully disclosed and detailed to investors, and the disclosures must include an explanation of the conflicts of interest involved between the fund (and its investors) and the investment manager.
FINRA found that fund assets were improperly used for multiple trips by a fund manager to a “gentlemen’s club,” payments for limousine services, salaries of certain non-clerical employees, and “consulting fees related to research” for which proper identifying invoices were unavailable, among other things. FINRA press release available here.