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BD Allowed Adviser to Misuse Soft Dollar Credits

A large broker-dealer agreed to pay over $800,000 in disgorgement, interest, and penalties for failing to police an advisor client’s misuse of soft dollars.  According to the SEC, the respondent paid soft dollar credits where red flags should have alerted the broker-dealer that the expenses may not have been permissible.  The expenses included payments to a principal’s ex-wife, rent at a personal residence, and maintenance on a timeshare.  The SEC argues that all the expenses fell outside the 28(e) safe harbor, yet the broker-dealer did not get sufficient supporting documentation including a legal opinion.  The SEC charged the BD with aiding and abetting the advisor’s violations of the Advisers Act’s antifraud rules.
OUR TAKE: We didn’t know that a broker-dealer had an affirmative obligation to supervise the use of soft dollar credits.  We also didn’t know that an entity that is not engaging in advisory activities could have liability under the Advisers Act.  Perhaps, this case is another example of the SEC prosecuting the gatekeepers.

http://www.sec.gov/litigation/admin/2013/34-71191.pdf

One comment

  1. Kevin Warmack says:

    Over te years, there have been several pronouncements from the SEC and FINRA concerning what are proper soft dollar payments and soft dollar uses. The order points out that some individuals at Instinet did acknowledge that the payments being made were not legal payments. Broker-dealers have been warned about this isssue. It is one of the areas along with commission recapture that may in time get a broker-dealer having to respond to the SEC or FINRA.

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