UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Investment Advisers Act of 1940 Release No. 1688 / December 22, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9514 - - - - - - - - - - - - - - - x : In the Matter of : : ORDER INSTITUTING PUBLIC RENAISSANCE CAPITAL : PROCEEDINGS, MAKING FINDINGS, ADVISORS, INC. and : IMPOSING REMEDIAL SANCTIONS, RICHARD N. FINE, : AND ISSUING CEASE-AND- : DESIST ORDER Respondents. : : - - - - - - - - - - - - - - - x I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Sections 203(e), (f) and (k) of the Investment Advisers Act of 1940 ("Advisers Act"), against Renaissance Capital Advisors, Inc. ("Renaissance") and Richard N. Fine ("Fine"). In anticipation of the institution of these proceedings, Renaissance and Fine have submitted Offers of Settlement ("Offers") 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 without admitting or denying the findings contained herein, except as to Paragraphs II.A. and B., which are admitted, Renaissance and Fine consent to the issuance of this Order Instituting Public Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease-and-Desist Order, ("Order") and to the entry of the findings, cease-and-desist order, and remedial sanctions set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e), (f) and (k) of the Advisers Act be, and hereby are, instituted. II. On the basis of this Order and the Offers, the Commission makes the following findings: RESPONDENTS A. Renaissance has been registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act since November 30, 1990. Renaissance currently manages one discretionary account with assets totaling approximately $830,000.<(1)> B. Fine is, and at all relevant times was, the president and sole owner of Renaissance. Fine has at all relevant times made all investment decisions with respect to client accounts. INTRODUCTION C. This proceeding involves the failure by Renaissance and Fine to disclose a soft dollar arrangement. The term "soft dollars" generally describes an arrangement whereby an investment adviser uses commission credits generated by securities trades executed in advisory client accounts to pay for research, brokerage, or other products, services, or expenses. SOFT DOLLAR ARRANGEMENT D. In or about February 1991, Renaissance entered into a soft dollar arrangement with a broker-dealer ("Broker"). Fine made the decision to enter the arrangement and negotiated the arrangement on behalf of Renaissance. E. Renaissance submitted to Broker invoices and cancelled checks for expenses to be paid or reimbursed with soft dollar credits. Renaissance received cash from Broker as reimbursement for certain of Renaissance's expenses. F. Renaissance used the soft dollar credits to pay for charge card bills (including parking, meals, travel, lodging), car services, messenger <(1)> Pursuant to the Investment Advisers Supervision Coordination Act (see Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Rel. No. 1683, Fed. Sec. L. Rep. (CCH) 85,940 (May 15, 1997)), Renaissance filed a Form ADV-T on August 20, 1997 indicating that it was withdrawing its investment adviser registration. The withdrawal was effective that date. However, Renaissance's withdrawal will not have any effect on the charges against Renaissance and Fine since the violative conduct occurred before the withdrawal. ======END OF PAGE 2====== services, rent, telephone bills, furniture rentals, office supplies and accounting expenses, as well as research services. SOFT DOLLAR PRACTICES INCONSISTENT WITH ADV DISCLOSURE G. Part II, Item 12 of Form ADV requires investment advisers to disclose the factors they employ in selecting brokers and determining the reasonableness of their commissions. If the value of products, research and services provided by a broker is a factor, then Item 12 requires a description of the products, research and services. Renaissance's response to Part II, Items 12.A.(3) and 12.A.(4) of the Form ADV, filed on November 30, 1990, stated: The initial criteria that Renaissance Capital Advisors, Inc. applies in selecting a broker to effect a securities transaction for any of its clients is whether the broker can provide the best price and execution for the transaction. In accordance with Section 28(e) of the Securities Exchange Act of 1934, however, Renaissance Capital Advisors, Inc. may select as brokers for its clients, those firms that furnish such research services as fundamental analyses of the economy, the political environment, the financial markets, specific industries, individual companies, and technical analyses of the financial market and/or individual securities. In following this policy, commissions may be paid that are higher than those obtainable from other brokers who do not provide research services. The research services provided by the broker used in a particular transaction is used to service all accounts. No formal procedures are used to direct client transactions to a particular broker in return for products and research services received. Brokers are regularly evaluated by Renaissance Capital Advisors, Inc. to determine the value to clients' accounts derived from the services provided and the reasonableness of the commissions paid. H. From February 1991 to January 1994, Renaissance used soft dollar credits to pay for non-research expenses. Renaissance's Form ADV became inaccurate once Renaissance began paying non-research expenses with soft dollars. Renaissance's failure promptly to amend its Form ADV created the false impression that Renaissance was using soft dollars only for research. I. Renaissance's Form ADV, contained a "no" answer to Part II, Item 13.A., which asks: "Does the applicant . . . have any arrangements . . . 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 light of the soft dollar arrangement, this answer became false in February 1991. Renaissance was in fact receiving an economic benefit from Broker, a non-client, in the form of soft dollar credits. The false answer remained in Renaissance's Form ADV until it was amended on March 30, 1995. ======END OF PAGE 3====== J. Renaissance's practice of using soft dollars for non-research expenses was not disclosed to Renaissance's clients in its Form ADV and was not otherwise disclosed to Renaissance's clients. BOOKS AND RECORDS K. Renaissance created and distributed marketing brochures which included performance figures for Renaissance from 1984 to 1993. Renaissance did not maintain internal working papers or other records or documents necessary to form the basis for or demonstrate the calculation of performance for 1984 through 1993. RELIANCE ON LOANS AND SOFT DOLLARS TO REMAIN SOLVENT L. Fine infused capital into Renaissance in the form of loans which Renaissance was obligated to repay. Without Fine's loans and without the use of soft dollar credits to pay certain operating expenses, Renaissance would have been insolvent. Renaissance failed to disclose to clients that Renaissance's financial condition was reasonably likely to impair the ability of the investment adviser to meet contractual commitments to clients. III. LEGAL ANALYSIS A. An investment adviser has a duty to disclose to clients all material information which might incline an investment adviser consciously or unconsciously to render advice which is not disinterested. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963). 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). B. Soft dollar arrangements are material because of the potential conflict of interest arising from an adviser's receipt of some benefit in exchange for directing brokerage on behalf of client accounts. See Kingsley, Jennison, McNulty & Morse, Inc., 55 SEC Docket 2434, 2441 (Dec. 23, 1993); Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release No. 23170, 35 SEC Docket 905, 909 (Apr. 23, 1986) ("1986 Soft Dollar Release"). C. Moreover, disclosure of soft dollar arrangements is specifically required by Form ADV.<(2)> See Oakwood Counselors, Inc., Advisers Act <(2)> The "safe harbor" provided by Section 28(e) of the Securities Exchange Act of 1934 ("Exchange Act") does not excuse an investment adviser from these disclosure obligations. The safe harbor protects an investment adviser only from charges of breach of fiduciary duty for failing to obtain the lowest available commission (continued...) ======END OF PAGE 4====== Release No. 1614 (Feb. 10, 1997); S Squared Technology Corp., Advisers Act Release No. 1575 (Aug. 7, 1996). Form ADV embodies mandatory disclosure requirements to 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 Release No. 664 (Jan. 30, 1979); Disclosure of Brokerage Placement Practices By Certain Regulated Investment Companies and Certain Other Issuers, Advisers Act Release No. 665 (Jan. 30, 1979) ("1979 Soft Dollar Release"). D. Items 12 and 13, and Schedule F, of Part II of Form ADV require registrants to disclose soft dollar arrangements with broker-dealers. For investment advisers who have discretionary authority to select the broker- dealers to be used to execute trades in client accounts, Item 12.B. requires a description of the factors considered in selecting brokers and determining the reasonableness of their commissions. Further, Item 12.B. requires advisers to describe the "products, research and services" received from broker-dealers, if the value of such "products, research and services" is a factor in selecting broker-dealers.<(3)> Item 13 requires an investment adviser to disclose and describe any arrangement whereby it receives an economic benefit from a non-client in connection with giving advice to clients.<(4)> These disclosure requirements are designed to "assist clients in determining whether to hire an adviser or continue a contract with an adviser, and permit them to evaluate any conflicts of interest inherent in the adviser's arrangements for allocating brokerage." Kingsley, 55 SEC Docket at 2441-42; see S Squared, Advisers Act Release No. 1575. VIOLATIONS OF SECTIONS 206(1) AND 206(2) OF THE ADVISERS ACT E. Sections 206(1) and (2) prohibit an investment adviser from employing any device, scheme, or artifice to defraud clients or from engaging in any transaction, practice or course of business that operates as a fraud on clients. Sections 206(1) and (2) establish a fiduciary duty for investment advisers to act for the benefit of their clients. <(2)>(...continued) rate where the amount of commission is reasonable in relation to the value of brokerage and research services provided. 1986 Soft Dollar Release, 35 SEC Docket at 907 n.10. <(3)> See 1986 Soft Dollar Release, 35 SEC Docket at 909. There is a presumption that receipt of non-research and non-brokerage products or services, except where nominally valued, is a factor in the selection of brokers. 1979 Soft Dollar Release at n.6. <(4)> The 1986 Soft Dollar Release noted the relevance of Form ADV, Part II, Item 13 to soft dollar disclosure. 35 SEC Docket at 909 n.32. ======END OF PAGE 5====== Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). An investment adviser's failure to disclose its soft dollar practices violates Sections 206(1) and 206(2). Oakwood, Advisers Act Release No. 1614 (Sections 206(1) and 206(2)); S Squared, Advisers Act Release No. 1496 (Section 206(2)); SEC v. Tandem Capital Management, Inc., Litigation Release No. 14670, 60 SEC Docket 1331 (October 2, 1995)(Sections 206(1) and (2)); SEC v. Galleon Capital Management, Litigation Release No. 14315, 57 SEC Docket 2939 (Nov. 1, 1994)(Sections 206(1) and (2)). Scienter is an element of a Section 206(1) violation. Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979). Proof of scienter is not required to establish a violation of Section 206(2). SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963). F. Renaissance willfully violated Sections 206(1) and (2) by making materially false and omissive statements in Renaissance's Form ADV and by failing otherwise to disclose to Renaissance's clients that Renaissance was using soft dollar credits to pay non-research expenses. G. Fine willfully aided and abetted and caused Renaissance's violation of Sections 206(1) and (2) by knowingly, recklessly and negligently making materially false and omissive statements in Renaissance's Form ADV and by failing otherwise to disclose to Renaissance's clients that Renaissance was using soft dollar credits to pay non-research expenses. H. As a result of Renaissance's and Fine's violative conduct, Renaissance was unjustly enriched by $123,430.27. VIOLATIONS OF SECTION 206(4) OF THE ADVISERS ACT AND RULE 206(4)-4 THEREUNDER I. Under Section 206(4) and Rule 206(4)-4(a)(1), it is a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to fail to disclose to any client or prospective client all material facts with respect to a "financial condition of the adviser that is reasonably likely to impair the ability of the adviser to meet contractual commitments to clients, if the adviser has discretionary authority . . . over such client's funds or securities . . . ." J. Without Fine's loans and the use of soft dollar credits to pay certain operating expenses, the firm would have been insolvent. Renaissance violated Section 206(4) and Rule 206(4)-4 by failing to disclose to clients that Renaissance's financial condition was reasonably likely to impair the ability of the investment adviser to meet contractual commitments to clients. Fine willfully aided and abetted and caused Renaissance's violation of Section 206(4) and Rule 206(4)-4. VIOLATIONS OF SECTION 204 OF THE ADVISERS ACT AND RULES 204-1 AND 204- 2 THEREUNDER ======END OF PAGE 6====== K. Section 204 and Rule 204-2 require investment advisers to make and to keep true, accurate, complete, and current books and records, and to maintain certain other records for a period of five years. Renaissance violated Section 204 and Rule 204-2 by failing to maintain "all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of any or all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons" as required by Rule 204-2(a)(16). L. Section 204 and Rule 204-1(b)(1) require investment advisers promptly to amend inaccurate material statements and to file an amendment to the Form ADV within 90 days of the end of the fiscal year. From 1991 through 1994, Renaissance failed to amend its Form ADV within 90 days of the end of the fiscal year or to correct its disclosure of its soft dollar practices after February 1991, when Renaissance entered into the soft dollar arrangement with Broker. M. Section 204 and Rule 204-1(c)(1) require investment advisers to file a Form ADV-S within 90 days of the end of the fiscal year unless its registration has been withdrawn, cancelled or revoked prior to that date. From 1991 through 1994, Renaissance failed to file its Form ADV-S within 90 days of the end of the fiscal year. N. Fine willfully aided and abetted and caused Renaissance's violation of Section 204 and Rules 204-1(b)(1), 204-1(c)(1) and 204-2. IV. Based on the foregoing, the Commission finds that: 1. Renaissance willfully violated Sections 206(1), 206(2), 206(4) and 204 of the Advisers Act and Rules 206(4)-4, 204-1 and 204-2 thereunder. 2. Fine willfully aided and abetted and caused Renaissance's violations of Sections 206(1), 206(2), 206(4) and 204 of the Advisers Act and Rules 206(4)-4, 204-1 and 204-2 thereunder. V. Renaissance represents that it has revised its policies and procedures, and has adopted policies and procedures reasonably designed to prevent and detect violations of the federal securities laws in connection with soft dollar arrangements, which are set forth in Renaissance's Statement of Policies and Procedures Regarding Soft Dollar Practices dated May 28, 1997, a copy of which has been provided to the Commission's staff. VI. ======END OF PAGE 7====== In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offers of Settlement. Accordingly, IT IS HEREBY ORDERED that: A. Renaissance shall be, and hereby is, censured; B. Renaissance shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Sections 206(1), 206(2), 206(4), and 204 of the Advisers Act and Rules 206(4)-4, 204-1 and 204-2 thereunder; C. Renaissance shall pay $172,583.94, which shall represent disgorgement of $123,430.27 and prejudgment interest of $49,153.67. Payment of $86,291.97 shall be made within ten (10) days of the date of this Order. Payment of the remaining $86,291.97 and postjudgment interest of $5,073.97 shall be made within six (6) months of the date of this Order. Payments shall be made by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the "United States Securities and Exchange Commission." The payments shall be transmitted to the Comptroller, Securities and Exchange Commission ("Comptroller"), 450 Fifth Street, N.W., Mail Stop 0-3, Washington, D.C. 20549, under cover of letter identifying the name and number of this administrative proceeding and the Respondent (Renaissance), and specifying that the payment is disgorgement and prejudgment interest. A copy of the cover letter and payment shall be simultaneously transmitted to Henry Klehm III, Senior Associate Regional Director, Securities and Exchange Commission, 7 World Trade Center, New York, New York 10048. D. The disgorgement and prejudgment interest paid by Renaissance shall be held by the Comptroller, to be utilized for payment to persons eligible to receive such funds pursuant to a plan of distribution, which shall be submitted by the Division of Enforcement within 60 days from the date of the payment by Renaissance. In the event that all or any portion of these funds remain after adjudication of any claims and disbursements of any funds, the remainder shall be disbursed to the United States Treasury. In no event shall any portion of these funds be returned to Renaissance or its agents, successors, or assigns. E. Renaissance shall, within thirty (30) days of the date of this Order, pay a civil money penalty in the amount of $10,000 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) delivered to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (4) submitted under cover letter which identifies Renaissance as a Respondent in these proceedings, and states the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Henry Klehm III, Senior Associate Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, NY 10048; ======END OF PAGE 8====== F. Renaissance shall comply with its undertakings as specified in its Offer of Settlement: 1. So long as Renaissance has any soft dollar arrangement with any broker-dealer, (a) Renaissance shall maintain the revised policies and procedures referred to at Paragraph V. above (the "Procedures") subject to any required revisions; (b) Renaissance shall provide to the Commission's staff a copy of any revisions made to the Procedures; and (c) at its own expense, Renaissance shall retain an independent consultant not unacceptable to the Commission's staff, who shall file within one (1) year from the date of this Order with the Northeast Regional Office a Certificate of Compliance indicating that Renaissance has complied with the Procedures; 2. Within thirty (30) days of the date of this Order, provide notice disclosing the material terms of this Order, in a form acceptable to the staff of the Commission, to all of its current clients; 3. Within forty five (45) days of the date of this Order, file an affidavit with the Commission's staff, addressed to the attention of the Regional Director of the Commission's Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, NY 10048, setting forth the details of its compliance with the undertakings set forth in subparagraph F.2. above; 4. For a period of sixty (60) days of the date of this Order, not solicit or accept the business of any new clients; 5. For a period of one (1) year of the date of this Order, provide a copy of this Order to all of its prospective clients; 6. Within one (1) year from the date of this Order, file an affidavit with the staff of the Commission certifying its compliance with subparagraph F.5. above. IT IS FURTHER ORDERED that: G. Fine shall be, and hereby is, censured; H. Fine shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Sections 206(1), 206(2), 206(4), and 204 of the Advisers Act and Rules 206(4)-4, 204-1 and 204-2 thereunder; I. Fine shall, within thirty (30) days of the date of this Order, pay a civil money penalty in the amount of $10,000 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) delivered to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (4) submitted under cover letter which ======END OF PAGE 9====== identifies Fine as a Respondent in these proceedings, and states the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Henry Klehm III, Senior Associate Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, NY 10048. By the Commission. Jonathan G. Katz Secretary