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February 24, 2006

Traders Take a Rain Check on Entertainment

By Michael Scotti

Boston sales traders and their clients are spending more evenings at home with family these days. Both dinners and outings with clients have dropped dramatically in the wake of an investigation by the Securities and Exchange Commission into Fidelity Investments over its trading desk's accepting lavish gifts and entertainment.

"It's zero tolerance for dinners and entertaining," said one trading executive. "And there's no such thing as an impromptu meeting." Some brokerage firms now require 30 days notice in advance of a dinner or outing, the exec said.

Portfolio managers and research sales have been affected only slightly, he added, while it's business as usual in all other departments at brokerage firms. (See related story page 14.)

The cutback in entertaining has also hit New York, according to one source, but not to the extent that Boston has seen.

"Everyone's running for cover, and they're scared," said one buyside equity trader, referring to what many believe to be a continuing investigation by the SEC into Boston firms. The added regulatory scrutiny has caused both brokers and buyside desks to reevaluate how they interact, particularly when it comes to entertainment, he said.

Their greatest fear is headline-grabbing stories like the kind Fidelity has had to endure, as well as the potential for extensive SEC audits.

One buyside trader in Boston estimated that dinners and outings like golf and ball games are down by about 75 percent since news of the investigation broke last spring. Another buysider agreed with those estimates. Gifts to the trading desk this past holiday season were almost always sent back, he said, adding that only token gifts like cookies and candies were accepted.

"We used to get multiple invites a week," said one buyside trader. "Now, we're lucky if we get multiple invites in a month. I'm usually the one saying, hey, let's get together.' "

Until recently in Boston, if a sales trader and a buysider went to a restaurant, they would often see a number of brokers entertaining clients. That's a rarity today, he said. "The last two times I went out, I didn't see anyone I knew," he added.

Another buyside trader recounted he saw the New England Patriots 10 times a couple of seasons ago. This past season he didn't attend any games. This same trader still will have an occasional dinner with a broker, but he added that even his dinner selection has been toned down: "A $50 steak at Ruth Chris' is out of the question."

One brokerage exec said the industry's current aversion to entertainment had "swung too far." Another exec agreed. He said the industry would feel more comfortable with dinners and entertainment once the SEC fines either firms or individuals, or both.

Buyside traders say there is value in cultivating the relationship of a trusted advisor like a sales trader, one who is privy to sensitive trading information. Meeting outside the office allows for discussions of industry topics or the relationship that wouldn't normally occur during the trading day.

Nevertheless, uncertainty reigns: "This isn't over," the brokerage exec said. "We don't know if another shoe is going to drop."

One buysider, explaining his new position on entertainment, said he was annoyed that his fiduciary responsibility to achieve best execution would be questioned because he attended a dinner or a ball game. "I don't have to defend why I traded with a broker if I don't go out," he said.