SEC Charges Hedge Fund Manager with Soft Dollar and Trade Allocation Violations
The SEC has commenced enforcement proceedings against a hedge fund manager for mis-use of soft dollar credits and for trade allocation practices. According to the SEC, the firm collected 2.25 cents worth of commission credits for every 3 cents of commissions paid. The SEC charges that the respondent unlawfully used credits to pay non-28(e) expenses disguised as rent and employee compensation. The SEC also charges that the respondent used a prime broker’s online platform to allocate profitable trades to his hedge funds where he was invested and earned performance fees. The SEC further alleges that the allocations allowed the respondent to market outsized returns.
OUR TAKE: Although the mis-use of soft dollar credits appears egregious in this case, the bigger issue may be a commission schedule that generated soft dollar credits equal to 75% of commissions paid. This begs the staff to question whether the adviser could have obtained better execution without the soft dollar trading, which then puts a heightened focus on the use of the soft dollar credits.