Broker Terra Nova Financial has been fined $400,000 by Finra for making more than $1 million in improper soft dollar payments to, or on behalf of, five hedge fund managers. The broker was also charged with failing to retain its business-related electronic instant messages.
Soft dollar payments are a way for money managers to pay service providers in-kind by passing on business, rather than in "hard dollars". Finra charged Chicago-based Terra Nova with failing to properly supervise its soft dollar programme or implement adequate supervisory procedures.
The firm has also been reprimanded for delaying the investigation by failing to timely respond to requests for productions of various documents, including e-mails and instant messages.
Finra says that in 2004 and 2005, Terra Nova made numerous improper soft dollar payments to or on behalf of five hedge fund advisors totalling more than $1 million.
Some payments - for estate planning fees, administrative staff and accounting expenses - were not allowed by the fund documents. Other payments made directly to the funds' managers were improper because Terra Nova did not receive written authorisation.
Payments included $13,700 for seven trips by a hedge fund manager to a "gentlemen's club" and $65,000 for credit card bills that contained charges for meals, clothing, auto repairs and parking tickets.
Finra sanctioned three people at the firm, fining soft-dollar administrator Cleovan Jordan, soft-dollar supervisor Joshua Teuber and chief compliance officer David Persenaire.
The watchdog says Terra Nova and Teuber failed to supervise the firm's soft dollar operations by failing to respond adequately to red flags indicating In addition, the firm and Persenaire failed to develop adequate systems and procedures in place to supervise its soft dollar group and that the firm failed to follow the policies it did have in place.
Susan Merrill, chief of enforcement, Finra, says: "Firms must not ignore red flags indicating the potential misuse of soft dollars that are generated from trading commissions. Soft dollars belong to the hedge fund investors and must be used for the benefit of the funds, or as permitted by the fund's own disclosure documents."
Terra Nova, Jordan, Teuber and Persenaire neither admitted nor denied the charges, but consented to the entry of Finra's findings.