INVESTMENT ADVISERS ACT OF 1940
Release No. 1866 / April 13, 2000
SECURITIES EXCHANGE ACT OF 1934
Release No. 42682 / April 13, 2000
Administrative Proceeding
File No. 3-10007
| In the Matter of
MICHAEL J. ROTHMEIER, Respondents.
|
ORDER MAKING FINDINGS |
I.
On September 9, 1999, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Donald C. Berry ("Berry") and others.1
II.
Respondent Berry has submitted an Offer of Settlement to the Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and prior to a hearing pursuant to the Commission´s Rules of Practice, 17 C.F.R. '201.100 et seq., and without admitting or denying the findings contained in this order, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which he admits, Respondent Berry consents to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth below.
III.
On the basis of the Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings ("Order") and the Offer of Settlement submitted by Respondent Berry, the Commission finds that:2
Settling Respondent
A. Berry, age 66, of West Hartford, Connecticut, was chief investment officer of Shawmut Investment Advisers, Inc. ("Shawmut Advisers") from September 1994 until December 1995, when he became a senior vice president and co-regional Connecticut manager at Fleet Investment Advisors Inc. ("Fleet Advisors"). Berry retired from Fleet Advisors on January 9, 1998.
Relevant Entities
B. Shawmut Advisers was registered with the Commission as an investment adviser (File No. 801-20738) from February 16, 1984 until December 31, 1995, when it withdrew its registration as an investment adviser. Its principal place of business was Boston, Massachusetts.
C. Fleet Advisors is an investment adviser registered with the Commission (File No. 801-20312) since December 30, 1983. As of December 1, 1995, Fleet Advisors became the successor-in-interest of Shawmut Advisers. Its principal place of business is Boston, Massachusetts. As a result of the matters giving rise to and relating to this Order, on September 9, 1999, Fleet Advisors, as successor to Shawmut Advisers, was ordered to cease and desist from committing or causing any violations and any future violations of Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rules 204-1(b)(1) and 204-2(a)(3) thereunder, and Section 17(e)(1) of the Investment Company Act of 1940, and to comply with certain undertakings. Fleet Investment Advisors Inc., Advisers Act Release No. 1821, 1999 SEC LEXIS 1805 (September 9, 1999).
FACTS
Summary
D. Berry aided and abetted and caused Shawmut Advisers´ breach of its fiduciary duty by failing to disclose the use of approximately $1,842,702 of equity commissions and fixed-income mark-ups and mark-downs ("commissions") generated from transactions in its clients´ accounts to compensate certain broker-dealers ("brokers") for actual and potential client referrals. From mid-1993 through December 1995, Shawmut Advisers represented to its clients in its disclosure document, Form ADV, that it selected brokers to execute its clients´ transactions on the basis of research the brokers provided. However, Shawmut Advisers directed client transactions to certain brokers on the basis of their ability to refer clients to Shawmut Advisers, and not based on research provided by the brokers. Berry, who was responsible for overseeing Shawmut Advisers´ compliance with its broker selection procedures from September 1994 until December 1995, approved the undisclosed direction of commissions to brokers, knowing or with reason to know that the primary purpose was to compensate the brokers for client referrals, and not for the research they provided.
Berry Circumvented Shawmut Advisers´ Brokerage Allocation Procedures and Approved the Undisclosed Direction of Brokerage on the Basis of Client Referrals
E. As of February 1, 1993, Shawmut Advisers had adopted written brokerage allocation policies and procedures designed to ensure that Shawmut Advisers´ use of commissions from its advisory clients´ transactions to generate soft dollars to pay for research and other brokerage services was consistent with its disclosures and within the provisions of Section 28(e) of the Exchange Act.3 Pursuant to its written procedures, Shawmut Advisers´ director of research periodically proposed a list of research brokers and the amount of commissions to be directed to each of them, based on polling the research analysts regarding the research contributions of the brokers. A commission allocation committee, consisting of Shawmut Advisers´ chief investment officer ("CIO"), the director of research and other investment professionals, approved a list of research brokers, and the amount of Shawmut Advisers´ anticipated discretionary commissions to be allocated to each research broker. As CIO, Berry was responsible for ensuring that Shawmut Advisers´s selection of brokers was in compliance with its policies and procedures for the selection of brokers.
F. In early fall 1994, members of the commission allocation committee raised concerns regarding the circumvention of Shawmut Advisers´ written brokerage allocation procedures to direct brokerage to brokers selected by a Shawmut Advisers´ salesman ("the Salesman"). As a result, in September 1994, the commission allocation committee, headed by Berry, adopted an exception to the brokerage allocation procedures. The exception provided a mechanism for approving brokerage allocations to the Salesman´s brokers who had not been approved by the committee. It allowed the CIO to unilaterally approve the addition of a broker to the research broker list when it was in the best interest of Shawmut Advisers´ clients.
G. Berry knew or had reason to know that the exception procedure was adopted to accommodate improperly the selection of the Salesman´s brokers, who did not meet Shawmut Advisers´ research criteria, and who were not selected in the best interest of Shawmut Advisers´ clients.
H. At a September 15, 1994 commission allocation committee meeting, Berry used the exception procedure to approve improperly an increase in the 1994 allocation previously approved by Shawmut Advisers´ former chief investment officer. Berry approved as "research brokers" nine brokers selected by the Salesman and an allocation to them of $445,000 in brokerage commissions for 1994. Berry knew or had reason to know that those allocations were based on client referrals, and not on research provided by the brokers.
I. From September through December 1994, based on Berry´s allocation to the Salesman´s brokers, Shawmut Advisers, without disclosure to clients, directed approximately $159,302 in brokerage commissions to the Salesman´s brokers based on client referrals.
J. In January 1995, Berry used the exception procedure to approve improperly the Salesman´s request for allocations of approximately $605,000 to his brokers, including an allocation of $250,000 to a Michigan broker. Respondent Berry knew or had reason to know that those allocations were based on client referrals, and not on research provided by the brokers.
K. During a commission allocation meeting in July 1995, the Salesman recommended an increase in the brokerage allocation to the Michigan broker to $400,000 from $250,000.
L. However, Berry became concerned that an increased allocation to the Michigan broker would draw the attention of regulators and suggested that Shawmut Advisers find another broker to split the commissions with the Michigan broker.
M. Pursuant to Berry´s suggestion, in August 1995, the Salesman arranged for a national broker to split commissions with the Michigan broker. Pursuant to the arrangement, the national broker executed transactions in Shawmut Advisers´ clients´ accounts, and forwarded 80% of the commissions on those transactions to the Michigan broker.
N. In August 1995, Berry used the exception procedure to approve improperly a brokerage allocation to the national broker, knowing that it would forward a portion of the commissions to the Michigan broker. At the same time, Berry decreased the direct allocation to the Michigan broker, thereby ensuring that Shawmut Advisers´ commission reports would show a decrease in the allocation to the Michigan broker. The reports were misleading, however, because by directing commissions to the national broker, Shawmut Advisers actually had increased the Michigan broker´s 1995 allocation of brokerage commissions generated by Shawmut Advisers´ client transactions.
O. During 1995, based on Berry´s allocation to the Salesman´s brokers, Shawmut Advisers, without disclosure to clients, directed approximately $563,419 in brokerage commissions to nine brokers, including the national broker and the Michigan broker, selected by the Salesman based on client referrals.
P. Thus, from September 1994 through 1995, Berry approved allocations to the Salesman brokers knowing or with reason to know that the Salesman selected the brokers on the basis of client referrals, and that the research provided by the brokers, if any, had not been evaluated pursuant to Shawmut Advisers´ procedures.
Q. Berry, as CIO, knew or had reason to know that Shawmut Advisers was required to, but did not disclose, its allocation of client brokerage commissions on the basis of client referrals from September 1994 through 1995.
R. In addition, Berry failed to disclose Shawmut Advisers´ client referral arrangements in response to a May 16, 1995 request from one of the Salesman´s clients as to whether Shawmut Advisers had any formal or informal agreements to compensate any individual or firm for activities leading to the selection of Shawmut Advisers as an investment adviser.
Violations
S. As a result of his actions, Berry willfully aided and abetted and caused Shawmut Advisers´s violations of Sections 206(1) and (2) of the Advisers Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Berry´s Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED:
A. pursuant to Section 203(k) of the Advisers Act, that Berry cease and desist from committing or causing any violation and any future violation of Sections 206(1) and (2) of the Advisers Act;
B. pursuant to Section 203(f) of the Advisers Act, that Berry be, and hereby is, suspended from association with any investment adviser for a period of six months, effective on the second Monday following the entry of this Order;
C. pursuant to Section 203(i) of the Advisers Act, that Berry shall pay a civil penalty in the amount of $5,000 to the United States Treasury within thirty days of the date of the entry of the Order. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier´s check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Berry as the Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108; and
D. Berry shall comply with his undertaking to provide, within thirty days after the expiration of the suspension described in paragraph IV.B., above, an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108, setting forth with particularity the details of his compliance with the suspension.
By the Commission.
Jonathan G. Katz
Secretary
FOOTNOTES
| 1 | An Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings against Berry and others was issued by the Commission on September 9, 1999. |
| 2 | The findings herein are made pursuant to Respondent Berry´s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. |
| 3 | Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor that protects an investment adviser from charges of breach of fiduciary duty for failing to obtain the lowest available commission rate when the adviser uses client brokerage commissions to obtain research and brokerage services from or through a broker-dealer, and discloses such use (and complies with other requirements). Research is generally defined as a product or service that provides lawful and appropriate assistance to a money manager in making investment decisions. See Republic New York Securities Corporation and James Edward Sweeney, Advisers Act Rel. No. 1789, 1999 SEC LEXIS 278 (Feb. 10, 1999); see also 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170, 35 SEC Docket 905, 906-907 (April 23, 1986) ("1986 Soft Dollar Release"). |