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.


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