BD Fined $400,000 for Failing to Stop Misuse of Soft Dollars
FINRA fined a broker-dealer $400,000, and fined and suspended three officers including the CCO, for allowing soft dollar payments to be used for impermissible expenses. According to FINRA, the firm set up soft dollar credit accounts to encourage several hedge fund clients to trade through the firm. FINRA alleges that the firm paid expenses that did not qualify as research or brokerage-related services and were not authorized and disclosed by the hedge funds’ organizing and disclosure documents. FINRA notes that the firm’s WSPs required review of the offering documents to determine if the payments were permissible.
OUR TAKE: We find two concepts notable about this case: (1) the broker-dealer has responsibility for policing use of soft dollars and (2) FINRA’s implication that a fund manager could use soft dollars for non-28(e) expenses so long as such use is permitted by the fund’s organizing and disclosure documents.