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Spoofing, Surveillance and Supervision

Jay Biondo, Product Manager - Surveillance at Trading Technologies, co-authored an article along with James Lundy and Nicholas Wendland, both of Drinker Biddle & Reath LLP, reviewing the CFTC's regulations and expanding efforts, 21st century surveillance and supervision, as well as strategic recommendations.

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July 31, 1998

SEC's Probe of Soft-Dollar Business Abuses

By Staff Reports

The Securities and Exchange Commission is calling for changes in how investors are provided information on soft-dollar arrangements between institutions and brokers handling their investments.

An SEC official, who declined to be named, has reportedly said a pending SEC staff report examining abuses in the $1 billion soft-dollar business will recommend more public disclosure of institutions' soft-dollar arrangements.

The SEC staff is expected to state that generally, investors are poorly informed about the exact nature of soft-dollar services institutions receive from brokers.

Mutual funds, consequently, would have to provide more soft-dollar disclosure to their board of directors.

The report is said to be particularly critical of investment advisers for not providing adequate soft-dollar disclosure, and will describe possible cases of abuses.

The alleged abuses were discovered during an 18-month sweep of 250 institutions and 75 brokers that use soft dollars. At press time, the long wait for the report was nearing an end, according to published reports.

Examiners working on the report for the SEC's Office of Compliance Inspection and Examinations, reportedly did not find substantial evidence of fraud in the soft-dollar business.

However, about ten percent of the examinations are being studied for possible security-law violations, and were submitted to the SEC's enforcement division, people familiar with the probe said.

Soft-dollar arrangements are perfectly legal under federal law as long as investors receive a fair share of the rebates.

The SEC currently requires institutions to disclose its soft-dollar arrangements often for third-party research to investors. SEC staff members, however, are expected to recommend that soft-dollar disclosure rules be tightened, an SEC aide confirmed

In a typical soft-dollar arrangement, an institution will received a predetermined quantity of soft-dollar services in exchange for sending a specified amount of commission business on its listed trades.