January 06, 2007

Renting and Commissioning Trouble

-- By Pushpa Sathish, Staff Writer

Is it a case of you scratch my back and I’ll scratch yours? That’s what William Gavin, Massachusetts Secretary of State is attempting to find out. European bank UBS AG finds itself plumb in the middle of this controversy. The financial institution rents office space to hedge funds in Boston, and also provides them with staff, consultants and other perks including coffee machines.

All above board, you say? Not so, according to Massachusetts officials. They are probing allegations that the hedge funds leasing space are in return providing the bank with trading business at higher commissions than normal. With the final bill being footed by the hedge funds’ clients, the question remains – do they know why they are incurring the higher costs?

Galvin says that hedge funds may be in violation of soft dollar rules – soft dollars are generally not reported in accounting books, and are added to brokerage fees. If hedge funds are in deed using trading commissions to pay for office space, they are transgressing the rules, since it’s against the law to pay rent using soft dollars.

Though the use of soft dollars by wealth management institutions is controlled by the Securities Exchange Act of 1934, hedge funds are not bound by the Investment Company Act of 1940, and so, do not have their trade commissions monitored too closely, according to Tamar Frankel, a professor of corporate law at Boston University.

Regulation problems at the root here? Sure looks that way!

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