New Soft-Dollar Rules Loom For Hedge Funds

Jan 15 2007 | 12:22pm ET

Hedge funds, buoyed by the Goldstein decision which voided the Securities and Exchange Commission’s registration rule, have for the most part skirted the regulators’ watchful eye. But prime brokers are not so lucky, and in less than two weeks hedge funds’ luck itself may run out.

Next Wednesday, the SEC’s new soft-dollar directive comes into effect after a six-month grace period, and while it doesn’t directly affect hedge funds, it does affect the banks that do their trading and securities lending, among other things.

“The soft-dollar rules will be a back-door method for the SEC to attempt to audit hedge funds,” according to Richard Heller, a partner with New York law firm Thompson Hine. “Prime brokers are easily auditable,” he noted, adding, “Hedge funds are going to have to work with them to make sure that they are in compliance.”

The new rules, announced last July, puts stricter limits on what broker-dealers can do with soft-dollars, in-kind payments to brokerages, generally in the form of inflated commissions in return for research. Under the new directive, that means only research: advice, analysis, reports. In its investigation of soft-dollar abuses, the SEC found managers receiving all sorts of other “services,” including rent, phone bills, membership dues, professional license fees, entertainment and travel expenses, and, in at least one instance, a money manager’s college tuition payments.


In Depth

Q&A: Star Mountain's Brett Hickey On Investing In 'The Growth Engine Of America'

Sep 22 2017 | 5:06pm ET

Lower middle-market companies form the economic fabric of the nation, but they can...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Don’t Overlook These 6 Hybrid Cloud Concerns

Sep 14 2017 | 6:27pm ET

Cloud-based technology solutions have made tremendous inroads into the alternative...