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SEC Settles Soft Dollar Case Against Investment Advisor

Bookkeeping Failures Lead to Heavy Reimbursement and Fines

By John M. Baker, Esq.

The SEC recently settled an administrative proceeding against an investment adviser for bad soft dollar practices. In re Dawson-Samberg Capital Management nka Dawson-Giammalva Capital Management, Release No. IA-1889 (Aug. 3, 2000).

Soft dollar practices are arrangements under which products or services other than the execution of securities transactions are obtained by an investment adviser from or through a broker-dealer in exchange for the direction by the adviser of client brokerage transactions to the broker-dealer.

The case is an object lesson in the dangers of poor recordkeeping and inadequate disclosures. The most conspicuous soft dollar abuses were the inadvertent use of soft dollars to pay for non-research business travel and, to a lesser extent, personal travel. Apparently neither the adviser’s travel agent nor the adviser’s clerical employee was aware of the need to separate research business travel (which was properly covered by soft dollars) from non-research business travel (which was not).

When adviser personnel used the travel agent for personal travel, there was a similar failure to separate it out; the personnel were unaware that they were not paying for their personal travel. The adviser also used soft dollar credits to pay for marketing fees.

Although the adviser disclosed to clients that commissions would be directed to brokers who referred clients to it, that disclosure was inadequate because it did not inform investors that soft dollars would be used to compensate referring agents.

Finally, the adviser had a large amount of soft dollar payments that were not covered by its Form ADV disclosure, were not properly allocated when used to pay for mixed-used products or services, or were otherwise not properly documented.

The adviser’s treasurer, who was responsible for administering the soft dollar program, was found to have violated the Advisers Act, and the adviser was found both to have violated the Advisers Act and to have failed to supervise the treasurer.

The adviser reimbursed its clients in the amount of $174,000 for non-research business travel, $35,700 for personal travel, $270,000 for marketing fees, $938,000 for improperly documented soft dollars, and $405,319.56 in interest.

In addition, the adviser and the treasurer were censured, they were assessed civil penalties of $100,000 and $20,000 respectively, and the adviser was required to retain an independent consultant to review its policies and procedures.

The SEC order is available online at http://www.sec.gov/enforce/adminact/ia-1889.htm

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  

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