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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940
RELEASE NO. 1984 / September 28, 2001

INVESTMENT COMPANY ACT OF 1940
RELEASE NO. 25200 / September 28, 2001

ADMINISTRATIVE PROCEEDING
File No. 3-10606


In the Matter of

DUFF & PHELPS INVESTMENT
MANAGEMENT CO., INC.,

Respondent.


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ORDER INSTITUTING PROCEEDINGS
PURSUANT TO SECTIONS 203(e)
AND 203(k) OF THE INVESTMENT ADVISERS
ACT OF 1940 AND SECTION 9(f) OF THE
INVESTMENT COMPANY ACT OF 1940,
MAKING FINDINGS AND IMPOSING
REMEDIAL SANCTIONS AND
CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Section 9(f) of the Investment Company Act of 1940 ("Company Act") against Duff & Phelps Investment Management Co., Inc. ("Duff"), an investment adviser registered with the Commission.

II.

In anticipation of the institution of these proceedings, Duff has submitted an Offer of Settlement that 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 without admitting or denying the findings, except those findings pertaining to the jurisdiction of the Commission over it and the subject matter of these proceedings, which Duff admits, Duff by its Offer of Settlement consents to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth below.

Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e) and 203(k) of the Advisers Act and Section 9(f) of the Company Act be, and hereby are, instituted.

III.

On the basis of this Order Instituting Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Section 9(f) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order") and the Offer of Settlement submitted by Duff, the Commission makes the following findings:1

A. THE RESPONDENT

Duff, a registered investment adviser since 1979, has its principal place of business in Chicago, Illinois. As of December 28, 2000, Duff managed 112 discretionary accounts with total assets of $9.5 billion. Duff also was during the relevant period and continues to be an investment adviser to investment companies registered with the Commission under the Company Act. In 1995, Duff's parent, Duff & Phelps Corporation, merged with Phoenix Securities Group, Inc., then a subsidiary of Hartford, Connecticut-based Phoenix Home Life Mutual Insurance Company. Duff currently is a wholly-owned subsidiary of Phoenix Investment Partners, Ltd., which is a wholly-owned subsidiary of Phoenix Investment Management Company. Phoenix Investment Management Company, in turn, is wholly owned by Phoenix Companies, Inc.

B. FACTS

1. Summary

This proceeding is based on Duff's undisclosed direction of a total of $715,750 of advisory client commission business to East West Institutional Services, Inc. ("East West), a Michigan broker-dealer, and a Chicago-based pension consultant (the "Pension Consultant"), in exchange for the referral of a client, a pension fund for the International Brotherhood of Teamsters Union Local 710 ("Local 710"). Duff did not disclose to its clients its direction of brokerage in exchange for a client referral, and it affirmatively and falsely stated in its Commission filings that it did not direct commissions in exchange for client referrals. Certain of the commissions that Duff directed for the benefit of East West to obtain the client referral involved transactions for an investment company with which Duff had an investment advisory agreement.

In mid-1994, Duff, through a salesperson who was also a vice president of sales and marketing ("Duff salesman"), agreed to direct brokerage trades to East West. In exchange, East West agreed toinfluence the Local 710 to award management of a portion of its pension fund to Duff. East West was able to influence the Local 710 because it had an arrangement with two trustees of the Local 710 ("the two trustees"), who received illegal kickbacks of commissions from East West. In June 1995, after Duff had directed $177,000 in commissions for the benefit of East West, East West influenced the Local 710 to select Duff to manage $120 million of its assets. Senior officers of Duff knew or were reckless in not knowing about the directed brokerage scheme.2 In or about the end of March 1996, Duff began to significantly reduce the amount of brokerage it directed to East West. Instead, during this same time period, Duff entered into a soft-dollar agreement with the Pension Consultant, which at that time was advising the Local 710.3 Duff agreed to pay a $100,000 annual fee with soft dollars to the Pension Consultant, derived from commission business directed to the Pension Consultant's broker-dealer affiliate, in exchange for a recommendation from the Pension Consultant that the Local 710 retain Duff as an investment adviser. Pursuant to its arrangements, Duff continued to direct transactions to benefit East West until the spring of 1997 and to the Pension Consultant until July 1997. After Duff ceased directing commissions to those firms, the Local 710 terminated its contract with Duff. Duff did not disclose these arrangements to disinterested representatives of the Local 710 or its other clients while it retained management of the Local 710 account from June 1995 through July 1997. As a result of the above, Duff willfully violated Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rule 204-1(b)(1) thereunder as then in effect, and Section 17(e)(1) of the Company Act.

2. Duff's Direction of Brokerage in Exchange for Management of the Local 710 Pension Fund

(a) East West's Agreement with Local 710 and Duff's Agreement with East West

In approximately 1994, East West entered into an arrangement with the two trustees of the Local 710. Under this arrangement, East West agreed to kick back to the two trustees a portion of the commissions directed to it by the Local 710's investment advisers. The advisers would direct the trades to East West through one of its clearing brokers, and East West would forward some of that money to the two trustees.

In mid-1994, the Duff salesman met with a representative from East West. The Duff salesman had learned that East West had the ability to influence selection or retention of money managers by the Local 710 pension fund. East West and the Duff salesman agreed that Duff would direct $600,000 in commissions annually to benefit East West, and, in return, East West would influence the Local 710 to award management of $120 million of its pension fund to Duff. East West specifically informed the Duff salesman that the directed brokerage arrangement should be concealed from the disinterested Local 710 trustees. The two trustees of the Local 710 required Duff to direct a certain amount of business to East West before they awarded Duff management of the Local 710's assets.

After meeting with East West, the Duff salesman told others at Duff, including senior officers, that if Duff directed commissions to East West, that firm could arrange for Duff to make a marketing pitch to the Local 710. The Duff salesman further explained that Duff's chances of pitching the Local 710 as a client were directly related to the amount of commissions that Duff sent to East West.

(b) Duff's Policies Regarding Brokerage Allocation

In mid-1994, Duff's policies, as stated in its Form ADV, provided that the firm would not direct brokerage for the purpose of obtaining business referrals. However, Duff allowed its marketing staff, such as the Duff salesman, to influence the direction of brokerage to firms that could potentially refer clients to Duff.

(c) Duff Began Directing Brokerage for the Benefit of East West

In mid-1994, Duff began directing commissions to benefit East West. Senior officers of Duff knew, or were reckless in not knowing, that Duff's direction of brokerage to East West was part of a quid pro quo to obtain the Local 710 as a client. Beginning in late 1994, East West contacted the Duff salesman approximately once a week to demand additional commissions. The Duff salesman, in turn, pressured other Duff employees to direct commissions. Senior Duff officers were aware of and/or participated in attempts to pressure Duff's traders to direct commissions to East West, and they were further aware of the impropriety of such practices. In January 1995, Duff's compliance officer notified the Duff salesman, Duff's president, and others at Duff that it was against Duff's policy, as stated in its Form ADV filed with the Commission, to direct brokerage to obtain client referrals.

In an apparent attempt to legitimize Duff's direction of trades, East West sent Duff research that it received from its clearing brokers. However, East West never attempted to evaluate whether the research was relevant to Duff's business. In fact, East West was unfamiliar with Duff's investment strategy. As a result, the research it sent to Duff generally was outdated and related minimally, if at all, to investment areas relevant to Duff's advisory service.

(d) Duff Obtained the Local 710 Account

In May 1995, approximately ten months after the Duff salesman entered into an agreement with East West, Duff officers, including the Duff salesman and Duff's president, made a presentation to theLocal 710's investment committee. Prior to the presentation, East West told the two trustees of Local 710 that Duff would continue to direct commissions to East West.

In June 1995, the Local 710 trustees selected Duff to manage a portion of its pension fund. Within weeks, the fund allocated $75 million to the account, and soon thereafter, in accordance with East West's representations to the Duff salesman, the Local 710 increased the amount to $120 million. During the two years that Duff managed the Local 710 pension fund, the fund paid Duff $985,870.46 in management fees. Prior to obtaining the account, Duff directed approximately $177,000 in commissions from its other clients, including an investment company, for the benefit of East West. Between June 1995 and the spring of 1997, Duff directed approximately $435,000 in equity commissions for the benefit of East West, for a total of $613,000 in commissions directed for the benefit of East West from mid-1994 to the spring of 1997.

On February 14, 1996, the Duff salesman, Duff's president, Duff's compliance officer, Duff's chairman, and Duff's head of fixed income met to discuss brokerage allocation. The Duff salesman informed the group that Duff would lose the Local 710 account unless it directed $600,000 in commissions over the next six months to East West. Duff's head of fixed income objected to the practice of directing brokerage in exchange for client referrals. Duff's compliance officer stated that Duff should not set a specific dollar amount of commissions for any broker, and Duff's chairman agreed. Nevertheless, Duff continued to direct commissions to East West, including approximately $124,000 in commissions from the time of the February 14, 1996 meeting until Duff ceased direction of brokerage to East West in the spring of 1997. Commissions directed for the benefit of East West declined during this time period only after Duff reached a soft dollar arrangement with the Pension Consultant, as described below.

In September 1996, in order to send a message to Duff that it needed to pay more commissions, East West and the two trustees caused Local 710 to reduce the amount of its account under Duff's management by $50 million. The reduction of assets was instigated by the two trustees and East West, who wanted to show Duff that it was in danger of losing the account.

In January 1997, Duff reaffirmed to the disinterested Local 710 trustees the accuracy of Duff's representations, warrants and covenants in its contract with the Local 710, which related to, among other things, the accuracy of Duff's Form ADV. As explained in more detail below, Duff's amendments to Forms ADV filed with the Commission between March 1995 and March 1997 contained material misrepresentations and omissions. In March 1997, the Duff salesman left Duff to take a position with another investment adviser. In April 1997, Duff's president left Duff to join with others in forming an investment management firm. Although payments to East West ceased in the spring of 1997, Duff retained management of the Local 710 account through July 1997, and continued receiving management fees through that time, without ever disclosing to the disinterested representatives of Local 710 that it had obtained management of the account by directing brokerage to East West.

(e) Direction of Commissions from Investment Companies

From at least November 1995, Duff had investment advisory agreements with certain investment companies. Duff directed trades on behalf of at least one of those investment companies for the benefit of East West as part of the scheme to obtain the Local 710 account. During the relevant time period, at least one of the investment companies paid commissions of at least $284,975.85 to East West's clearing broker for trades directed in furtherance of Duff's scheme.

3. Duff Paid the Pension Consultant to Retain the Pension Fund Account but Lost the Account After Ceasing Payments to East West and the Pension Consultant

In late 1994 or early 1995, the Local 710 hired the Pension Consultant, ostensibly to provide recommendations concerning its selection of money managers. In March 1995, the Pension Consultant recommended that the Local 710 hire Duff, which at the time was directing brokerage for the benefit of East West. As explained above, Duff obtained management of a portion of the Local 710 pension fund shortly thereafter.

In March 1996, after learning at the February 14, 1996 brokerage allocation meeting referenced above that Duff could not guarantee the direction of a specific dollar amount of commissions to East West and concluding that Duff would not be able to meet East West's demands for more commissions, the Duff salesman negotiated a soft dollar agreement with the Pension Consultant. Under this agreement, Duff agreed to pay a $100,000 annual fee with soft dollars to the Pension Consultant by directing commission business to the Pension Consultant's broker-dealer affiliate in exchange for a recommendation from the Pension Consultant that the Local 710 retain Duff as an investment adviser. Pursuant to this agreement, Duff began paying soft dollars to the Pension Consultant in July 1996. Thereafter, the Pension Consultant continued to recommend that the Local 710 retain Duff as an adviser.

In an effort to create the appearance that the $100,000 in directed commissions were for a legitimate purpose rather than to buy a recommendation, the Pension Consultant provided research to Duff comparing Duff's products and services with those of its peers. The research was substantially similar to research that Duff had purchased from another firm for an annual fee of no more than $40,000.

As stated above, Duff ceased directing brokerage to East West in the spring of 1997. Duff canceled its contract with the Pension Consultant on June 30, 1997. Two weeks later, the Local 710 notified Duff that it was being terminated as an investment adviser to Local 710. From July 1996 until the cancellation of its contract with the Pension Consultant, Duff paid a total of $102,750 in soft dollars to the Pension Consultant. Duff failed to disclose to its clients during this time period that it was directing commissions to the Pension Consultant in exchange for a favorable recommendation.

4. Duff's Amendments to Form ADV Filed with the Commission Contained Material False Statements and Omissions

Part II of Duff's amended Form ADV filed with the Commission and distributed to its clients did not disclose that Duff received client referrals in exchange for brokerage commission allocation. Indeed, in some instances, Duff affirmatively represented that it did not engage in such practices. On March 28, 1994, Duff filed an amendment to Form ADV with the Commission, which was signed by Duff's president. Duff answered "yes" to Part II, Item 12.A(3), which asks whether the applicant or any related person has authority to determine, without obtaining specific client consent, the broker or dealer to be used. A "yes" answer to this question requires that the applicant describe on Schedule F the factors considered in selecting brokers and determining the reasonableness of their commissions. If the value of products, research and services given to the applicant or a related person is a factor, the applicant must describe, among other things: (1) the products, research and services; and (2) any procedure the applicant used during the last fiscal year to direct client transactions to a particular broker in return for products and research services received. Under Item 12 on Schedule F of Duff's March 1994 Form ADV, Duff stated, among other things:

Under no circumstances do we share in commissions paid by our clients to brokerage firms nor do we receive referrals of potential investment counsel clients from brokerage firms in return for allocating brokerage business to them.

(emphasis added).

In addition, on its March 1994 amendment to Form ADV, Duff answered "yes" to Item 13.A of Part II, which asks whether the applicant or a related person has any arrangements, oral or in writing, where it is paid cash by or receives some economic benefit (including commissions, equipment or non-research services) from a non-client in connection with giving advice to clients. In its description on Schedule F, Duff described its participation in certain wrap fee programs with brokers, but not any arrangements to receive client referrals in exchange for brokerage. Furthermore, Duff answered "no" to Item 13.B. of Part II of Form ADV, which asks whether the applicant or a related person has any arrangements, oral or in writing, where it directly or indirectly compensates any person for client referrals.

Duff's answers to Items 12 and 13 of Part II of Form ADV remained essentially the same on the amendments to Form ADV signed by Duff's president and filed on March 31, 1995 and December 22, 1995, and on the amendments to Form ADV signed by Duff's compliance officer, and filed on January 5, 1996, and March 29, 1996. On December 13, 1996, Duff filed an amendment to Form ADV, also signed by the compliance officer, on which it answered "yes" to Item 13.B., indicating that it had arrangements to directly or indirectly compensate persons for client referrals. However, its description on Schedule F again explained Duff's participation in certain wrap fee programs with brokers, without mentioning any arrangements to receive client referrals in exchange for brokerage, and also contained the same affirmative statement that Duff does not, under any circumstances, receivereferrals of potential investment counsel clients from brokerage firms in return for allocating brokerage business. Duff's amendment to Form ADV filed on March 26, 1997, again signed by the compliance officer, was identical to the previous amendment, except that it deleted the statement that Duff did not receive referrals in exchange for allocation of brokerage commissions. Despite the removal of this affirmative representation, Duff nevertheless failed to disclose the direction of commissions to East West and the Pension Consultant in exchange for the referral of a client.

C. LEGAL ANALYSIS

1. Duff Willfully Violated Sections 206(1) and 206(2) of the Advisers Act

Sections 206(1) and 206(2) of the Advisers Act make it unlawful for any investment adviser, directly or indirectly, to employ any device, scheme or artifice to defraud, or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Scienter is an element of a Section 206(1) violation, but not a Section 206(2) violation. Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979); Oakwood Counselors, Inc. and Paul J. Sherman, Advisers Act Rel. No. 1614 (February 10, 1997), 1997 SEC LEXIS 304 at *12; SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963).

The Supreme Court has interpreted Section 206 to impose a fiduciary duty on investment advisers, requiring an affirmative obligation of utmost good faith, and full and fair disclosure of all material facts to an investment adviser's clients. Capital Gains Research, 375 U.S. at 194. This fiduciary duty requires investment advisers to act for the benefit of their clients, Oakwood,1997 SEC LEXIS 304 at *12 (citing Transamerica Mortgage Advisers, Inc., 444 U.S. 11, 17 (1979)), and precludes them from using their clients' assets to benefit themselves. Kingsley, Jennison, McNulty & Morse, Inc., Initial Decision Rel. No. 24 (November 14, 1991), 1991 SEC LEXIS 2587 at *9.

As a fiduciary, an investment adviser has a duty to disclose to clients "all material information which is intended `to eliminate, or at least expose,' all potential or actual conflicts of interest `which might incline an investment adviser consciously or unconsciously - to render advice which is not disinterested.'" 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170 (April 23, 1986), 1986 SEC LEXIS 1689(quoting Capital Gains Research, 375 U.S. at 191-92); Kingsley, 1991 SEC LEXIS 2587 at *38. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc., et. al. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Blavin, 557 F. Supp. 1304, 1313-15 (E.D. Mich. 1983), aff'd, 760 F.2d 706 (6th Cir. 1985) (per curiam) (materiality standard applied to Section 206 of the Advisers Act). The standard of materiality is whether a reasonable client or prospective client would have considered the information important in deciding whether to invest with the adviser. See SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). Information regarding an investment adviser's directed brokerage arrangements is material and must be disclosed to clients. Sheer Asset Management, Inc. and Arthur Sheer, Advisers Act Rel. No. 1459 (January 3, 1995), 1995 SEC LEXIS 10.

Moreover, disclosure of certain arrangements with brokers is specifically required by Form ADV filed with the Commission. Form ADV embodies mandatory disclosure requirements to ensure that material information regarding brokerage placement practices and policies is disclosed to investors. See Investment Adviser Requirement Concerning Disclosure, Recordkeeping, Applications for Registration and Annual Filings, Advisers Act Rel. No. 664 (January 30, 1979), 1979 SEC LEXIS 2235. Any arrangement to direct brokerage in exchange for benefits to the adviser is material and must be disclosed on Form ADV. Sheer Asset, 1995 SEC LEXIS 10.

Because Duff was a fiduciary to its advisory clients, it had a duty to disclose to clients all material information concerning potential or actual conflicts of interest, including information regarding its directed brokerage arrangements, which might have inclined Duff consciously or unconsciously to render advice which was not disinterested. Duff willfully violated Sections 206(1) and 206(2) of the Advisers Act by entering a quid pro quo arrangement, pursuant to which it agreed to direct brokerage and/or soft dollars for the benefit of East West and the Pension Consultant in exchange for the referral and retention of a client and which was not disclosed to the disinterested representatives of the client. The conduct and knowledge of senior Duff officers can be imputed to Duff to establish its violations. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1096 n.16 (2d Cir. 1972).

2. Duff Willfully Violated Section 207 of the Advisers Act

Section 207 of the Advisers Act makes it unlawful for any person willfully to make any untrue statement of material fact in any registration application or report filed with the Commission, or willfully to omit to state in any such application or report any material fact required to be stated therein. See S Squared Technology Corp., Advisers Act Rel. No. 1575 (August 7, 1996), 1996 SEC LEXIS 2159. A person violates Section 207 by filing materially false amendments to Form ADV. See Stanley Peter Kerry, Advisers Act Rel. No. 1550 (January 25, 1996), 1996 SEC LEXIS 193. Form ADV's mandatory disclosure requirements ensure that material information regarding brokerage placement practices and policies is disclosed to investors. See Investment Adviser Requirements Concerning Disclosure, Recordkeeping, Applications for Registration and Annual Filings, Advisers Act Rel. No. 664 (January 30, 1979), 1979 SEC LEXIS 2235; Disclosure of Brokerage Placement Practices By Certain Regulated Investment Companies and Certain Other Issuers, Advisers Act Rel. No. 665 (January 30, 1979), 1979 SEC LEXIS 2229.

Items 12 and 13 of Part II of Form ADV require an investment adviser with discretionary authority to select the brokers to execute trades in client accounts to disclose and describe its brokerage arrangements and, specifically, any arrangement where it directly or indirectly compensates any person for client referrals. Item 12.B of Form ADV requires a description of the factors considered in selecting brokers and determining the reasonableness of their commissions. Item 12.B also requires an adviser to describe the "products, research and services" received from brokers, if the value of such "products, research and services" is a factor in selecting brokers. Item 13.B requires an investment adviser to disclose and describe any arrangement whereby it directly or indirectly compensates any person for client referrals. These disclosure requirements are designed to "assist clients in determining whether to hire an adviser or continue a contract with an adviser, and permit themto evaluate any conflicts of interest inherent in the adviser's arrangement for allocating brokerage." Kingsley, Jennison, Advisers Act Rel. No. 1396 (December 23, 1993), 55 SEC Docket 2434.

Duff willfully violated Section 207 by making false representations, misrepresentations and omissions in its amended Forms ADV filed between March 1995 and March 1997. Specifically, Duff willfully violated Section 207 by falsely representing in Item 12 of Part II of these amendments to Forms ADV that it did not receive referrals from brokerage firms in exchange for the allocation of brokerage. Duff further willfully violated Section 207 when it represented in item 13.B. of Part II of these amendments to Forms ADV that it did not directly or indirectly compensate any person for client referrals. Finally, Duff willfully violated Section 207 when it failed to disclose under Item 12.B of Part II of these amendments to Forms ADV that it received client referrals from its brokerage allocation practices when it purported to identify "products, research and services" received from brokers that were a factor in selecting brokers. See Fleet Investment Advisors, Inc., Advisers Act Rel. No. 1821 (September 9, 1999), 1999 LEXIS 1805 (adviser violated Section 207 of the Advisers Act when it did not disclose that it allocated brokerage in exchange for client referrals).

3. Duff Willfully Violated Section 204 of the Advisers Act and Rule 204-1(b)(1) Thereunder

Section 204 of the Advisers Act and Rule 204-1(b)(1) thereunder, as then in effect, required investment advisers promptly to amend inaccurate material statements in most of Part II of Form ADV, including items 12 and 13B. Once Duff entered into its arrangements with East West to direct brokerage in exchange for a client referral, the statement in its March 1994 Form ADV that it did not receive referrals from brokerage firms in return for allocating brokerage became materially false, thus requiring prompt amendment under Rule 204-1(b)(1) as then in effect. However, Duff did not promptly file an amendment correcting this information. As a result, Duff willfully violated Section 204 and Rule 204-1(b)(1) thereunder as then in effect.

4. Duff Willfully Violated Section 17(e)(1) of the Company Act

Section 17(e)(1) of the Company Act makes it unlawful for an affiliated person of a registered investment company, when acting as an agent, to accept compensation from any source (other than a salary or wages from the registered investment company) for the purchase or sale of any property to or for the registered investment company. It is not necessary to show that the affiliated person was actually influenced by receipt of the compensation, that the receipt of the compensation caused economic injury to the investment company, or that the violator acted with scienter. See Parnassus Investments, Jerome L. Dodson, Marilyn Chou, and David L. Gibson, Initial Decision Rel. No. 131 (September 3, 1998), 1998 SEC LEXIS 1877, citing United States v. Deutsch, 451 F.2d 98, 109 (2d Cir. 1971); Investors Research Corporation, Fed. Sec. L. Rep. (CCH) ¶181,586 (May 1, 1978), aff'd in part and vacated in part, Investors Research Corporation and Stowers v. SEC, 628 F.2d 168 (D.C. Cir. 1980).

Pursuant to the definition of affiliated person in Section 2(a)(3) of the Company Act, Duff was an affiliated person of certain investment companies because it was the adviser to those funds. Duff willfully violated Section 17(e)(1) of the Company Act because it directed transactions from an investment company to benefit East West in return for the receipt of client referrals. See Fleet Investment Advisors, Inc., Advisers Act Rel. No. 1821 (September 9, 1999), 1999 LEXIS 1805 (adviser's receipt of client referrals in exchange for brokerage commissions from transactions executed on behalf of investment company constitutes compensation in violation Company Act); Stein Roe & Farnham Inc., Advisors Act Rel. No. 1217 (January 22, 1990), 1990 SEC LEXIS 71 (citing Investors Research, Fed. Sec. L. Rep. (CCH) ¶181,586).

IV.

In determining to accept the Offer of Settlement, the Commission considered remedial acts promptly undertaken by Duff and cooperation afforded the Commission staff.

V.

On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer of Settlement submitted by Duff.

VI.

Accordingly, IT IS ORDERED that:

A. Duff shall 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 Rule 204-1(b)(1) thereunder as then in effect, and Section 17(e)(1) of the Company Act;

B. Duff shall be, and hereby is, censured;

C. Duff shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $100,000 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Duff as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;

D. Concerning its direction of brokerage for the benefit of East West, Duff shall, within 30 days of the entry of this Order, pay disgorgement of $613,000 to the appropriate clients of Duff whoseassets were affected by the directed brokerage agreement between Duff and East West.4 If Duff is unable to pay any such clients due to factors beyond its control, any portion of the $613,000 which is not paid to clients shall be paid to the United States Treasury within 90 days of the entry of this Order. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Duff as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;

E. Concerning its direction of commissions for the benefit of the Pension Consultant, Duff shall, within 30 days of the entry of this Order, pay disgorgement of $102,750, plus pre-judgment interest in the amount of $38,411, to the appropriate clients whose assets were affected by the soft dollar agreement between Duff and the Pension Consultant. If Duff is unable to pay any such clients due to factors beyond its control, any portion of the $141,161 which is not paid to clients shall be paid to the United States Treasury within 90 days of the entry of this Order. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Duff as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;

F. Duff shall comply with its undertakings as specified in its Offer of Settlement to perform and implement the following:

  1. Within 30 days of the entry of this Order, Duff will provide to the Commission's staff and to each of its advisory clients an amended Form ADV, Part II, which discloses all material terms of any soft dollar arrangement it has with any broker-dealer.

  2. Within 30 days of entry of this Order, Duff will provide a copy of this Order to all its current clients, together with a cover letter in a form not unacceptable to the Commission's staff.

  3. For a period of one year after the entry of this Order, Duff will provide a copy of this Order to all prospective clients not less than 48 hours prior to entering into any written or oral advisory contract (or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering the contract).

  4. Within 60 days after the entry of this Order, Duff will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of its compliance with the undertakings set forth in subparagraphs F.1 and F.2.

  5. One year after the entry of this Order, Duff will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of its compliance with the undertakings set forth in subparagraph F.3.

  6. Duff shall comply with the following undertakings contained in its Offer of Settlement:

    a. Duff shall retain, within 30 days of the date of this Order, at its expense, an Independent Consultant (the "Consultant") not unacceptable to the Commission staff. The Consultant shall conduct a review of Duff's supervisory, compliance and other policies and procedures designed to prevent and detect federal securities laws violations relating to the direction of commissions for client referrals.

    b. Duff shall provide to the Commission staff, within 30 days of the issuance of this Order, a copy of an engagement letter detailing the Consultant's responsibilities.

    c. Duff shall cooperate fully with the Consultant, including providing the Consultant with access to its files, books, records and personnel as reasonably requested for the above-mentioned review, and obtaining the cooperation of Duff's employees or other persons under its control.

    d. The Consultant shall report to the Commission staff on its activities as the staff shall request.

    e. The Consultant may engage such assistance, clerical, legal or expert, as necessary and at reasonable cost, to carry out its activities and the cost, if any, of such assistance shall be borne exclusively by Duff.

    f. Duff shall require the Consultant, at Duff's expense, to prepare a report making recommendations as to Duff's policies and procedures and system for applying such procedures as described in paragraph 6(a).

    g. Duff shall require the Consultant to deliver the report to Duff and to the Commission staff within 90 days of the issuance of this Order.

    h. Duff shall adopt all recommendations by the Consultant in the report within six months after its issuance; provided, however, that as to any of the Consultant's recommendations that Duff determines it is unduly burdensome or impractical, Duff may suggest an alternative procedure designed to achieve the same objective, submitted in writing to the Consultant and the Commission staff. TheConsultant shall reasonably evaluate Duff's alternative procedure and Duff shall (1) abide by the Consultant's determination with regard thereto or (2) petition the Commission with notice to the Consultant and the Division of Enforcement, for relief from the Consultant's recommendations.

    i. Duff will hold a mandatory meeting with its employees to review policies and procedures discussed in the Consultant's report within 60 days of issuance of the report. Attendance at the meeting will be recorded and a copy maintained in Duff's files.

    j. Duff shall ensure that, for the period of the engagement and for a period of two years from the completion of the engagement, the Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Duff or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity. Any firm with which the Consultant is affiliated or of which s/he is a member, and any person engaged to assist the Consultant in the performance of its duties under this Order shall not, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Duff or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity as such for the period of engagement and for the period of two years after the engagement.

    k. Duff shall continue to employ a director of compliance, shall define the duties of such officer, and shall ensure that such officer has access to Duff's board of directors and is subject to the direct supervision of, and reports to, Duff's chief executive officer.

    l. Duff shall, within nine months from the issuance of this order, provide an affidavit by certified mail to Juan M. Marcelino, District Administrator, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, that it has complied with the undertakings in paragraphs 6(a) through 6(k). Such affidavit shall contain a statement describing the procedures adopted and implemented in compliance with paragraph 6(h). Such affidavit shall be submitted under cover letter which identifies Duff as the respondent in these proceedings, the file number and the Commission's case number. All other consultation with or reports to the Commission staff referenced in paragraphs 6(a) through 6(k) above shall also be directed to the attention of Juan M. Marcelino, District Administrator, Boston District Office, at the above address.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 The findings herein are made pursuant to Duff's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 None of these senior officers currently is employed by Duff.
3 "Soft dollar" practices generally describe arrangements whereby an adviser uses commission dollars generated by its advisory clients' securities trades to pay for research, brokerage, or other products, services or expenses. See S Squared Technology Corp., Advisers Act Rel. No. 1575, 62 SEC Docket 1560, 1561 (August 7, 1996). Section 28(e) of the Exchange Act provides a safe harbor from claims of breach of fiduciary duty for money managers who use the commission dollars of their advisory clients to acquire investment research and brokerage services, provided that all of the conditions of the section are met. 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170 (April 23, 1986), 1986 SEC LEXIS 1689. The "safe harbor" provided by Section 28(e) does not excuse an adviser from its disclosure obligations; it merely excuses an adviser from obtaining the lowest available commission rate. The money manager has the burden of proving that it made a good faith determination that the value of the research and brokerage services is reasonable in relation to the amount of commissions paid. Id.
4 The Commission notes that in 2000, Duff paid the sum of $579,000 to clients in partial satisfaction of this provision.


http://www.sec.gov/litigation/admin/ia-1984.htm


Modified: 10/01/2001