Exclusive Online Only ContentTerra Nova, Chief Compliance Officer Fined for Improper Soft-Dollar Payments
November 23, 2009
The Financial Industry Regulatory Authority said Monday it has fined broker-dealer Terra Nova Financial LLC of Chicago $400,000 for making more than $1 million in improper soft-dollar payments to or on behalf of five hedge fund managers, without following its own policies to ensure the payments were proper.
Terra Nova was also charged with failing to properly supervise its soft dollar program, failing to implement adequate supervisory procedures and failing to retain its business-related electronic instant messages. FINRA also said in a release that Terra Nova failed to respond in a timely fashion to FINRA’s requests to produce various documents, including emails and instant messages, “delaying FINRA’s investigation.”
FINRA sanctioned three individuals, including David Persenaire, Terra Nova’s Chief Compliance Officer (CCO). Persenaire, who served as the firm’s CCO until September 2009, was charged with failing to ensure the implementation of adequate written systems and procedures, suspended from acting in a supervisory or principal capacity for 10 days, fined $10,000 and required to take and pass a Compliance Official Qualification Exam.
Cleovan Jordan, the soft-dollar administrator who managed Terra Nova’s relationship with its hedge fund clients, was suspended from associating with a securities firm for 30 days and fined $20,000. Joshua Teuber, who supervised the soft-dollar operation, was charged with failure to properly supervise, suspended from acting in a supervisory or principal capacity for 20 days and fined $15,000. As part of the settlement, Terra Nova is required to retain an independent consultant to review and enhance its policies, systems and procedures relating to its soft dollar operations.
"Broker-dealers that collect soft dollars and make payments for their hedge fund clients must possess and implement adequate procedures that govern their soft-dollar practices," said Susan Merrill, FINRA’s EVP and chief of enforcement. "Soft dollars belong to hedge fund investors and must be used for the benefit of the funds, or as permitted by the fund’s own disclosure documents.”
FINRA found that in 2004 and 2005, Terra Nova made numerous improper soft-dollar payments to or on behalf of five hedge fund advisers totaling 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 authorization from a third party evidencing that the payments were appropriate, as required by fund documents that the firm had or should have obtained under its own policies.
Federal securities laws allow advisers to use soft dollars to pay for research or brokerage-related expenses. But advisers may only use soft dollars to pay for personal expenses or other non-research or non-brokerage related expenses if those types of payments were previously disclosed to investors and if they are made in accordance with the terms of the fund’s organizing documents.
FINRA is the main self-regulatory organization for broker-dealers.
