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UNITED STATES OF AMERICA
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| In the Matter of
MICHAEL J. ROTHMEIER, Respondents.
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ORDER MAKING FINDINGS |
I.
On September 9, 1999, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Michael J. Rothmeier ("Rothmeier") and others.1
II.
Respondent Rothmeier has submitted an Offer of Settlement 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 prior to a hearing pursuant to the Commission´s Rules of Practice, 17 C.F.R. '201.100 et seq., and without admitting or denying the findings contained in this order, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which he admits, Respondent Rothmeier consents to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth below.
III.
On the basis of the Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings ("Order") and the Offer of Settlement submitted by Respondent Rothmeier, the Commission finds that:2
Settling Respondent
A. Rothmeier, age 49, of Wellesley, Massachusetts, was chairman and director of Shawmut Investment Advisers, Inc. ("Shawmut Advisers") from September 1992 through October 1993, and was president and chief executive officer of Shawmut Advisers from November 1993 to December 1995. From December 1995 to his resignation on May 6, 1996, Rothmeier was a managing director of Fleet Investment Advisors Inc. ("Fleet Advisors").
Relevant Entities
B. Shawmut Investment Advisers, Inc. ("Shawmut Advisers") was registered with the Commission as an investment adviser (File No. 801-20738) from February 16, 1984 until December 31, 1995, when it withdrew its registration as an investment adviser. Its principal place of business was Boston, Massachusetts.
C. Fleet Investment Advisors Inc. ("Fleet Advisors") is an investment adviser registered with the Commission (File No. 801-20312) since December 30, 1983. As of December 1, 1995, Fleet Advisors became the successor-in-interest to Shawmut Advisers. Its principal place of business is Boston, Massachusetts. As a result of the matters giving rise to and relating to this Order, on September 9, 1999, Fleet Advisors, as successor to Shawmut Advisers, was ordered to 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 Rules 204-1(b)(1) and 204-2(a)(3) thereunder, and Section 17(e)(1) of the Investment Company Act of 1940, and to comply with certain undertakings. Fleet Investment Advisors Inc., Advisers Act Release No. 1821, 1999 SEC LEXIS 1805 (September 9, 1999).
FACTS
Summary
D. Rothmeier aided and abetted and caused Shawmut Advisers´ breach of its fiduciary duty by failing to disclose the use of approximately $1,842,702 of equity commissions and fixed-income mark-ups and mark-downs ("commissions") generated from transactions in its clients´ accounts to compensate certain broker-dealers ("brokers") for actual and potential client referrals. From mid-1993 through December 1995, Shawmut Advisers represented to its clients in its disclosure document, Form ADV, that it selected brokers to execute its clients´ transactions on the basis of research the brokers provided. However, Shawmut Advisers directed client transactions to certain brokers on the basis of their ability to refer clients to Shawmut Advisers, and not based on research provided by the brokers. Rothmeier supported the direction of commissions to brokers selected on the basis of client referrals, knowing or with reason to know that the practice was required to be disclosed under the federal securities laws. Rothmeier also signed four amendments to Form ADV in 1994 and 1995 knowing or with reason to know that the amendments omitted material information required to be disclosed in Part II of Form ADV.
Rothmeier Supported the Undisclosed Allocation and Direction of Client Generated Commissions to Brokers for Client Referrals
E. On or about February 1, 1993, Rothmeier approved Shawmut Advisers´ written brokerage allocation procedures. Those procedures were designed to ensure that Shawmut Advisers´ use of commissions from its advisory clients´ transactions to generate soft dollars to pay for research and other brokerage services was consistent with its disclosures and within the provisions of Section 28(e) of the Exchange Act.3 Pursuant to its written procedures, Shawmut Advisers´ director of research periodically proposed a list of research brokers and the amount of commissions to be directed to each of them, based on polling the research analysts regarding the research contributions of the brokers. A commission allocation committee, consisting of Shawmut Advisers´ chief investment officer, the director of research and other investment professionals, approved a list of research brokers, and the amount of Shawmut Advisers´ anticipated discretionary commissions to be allocated to each research broker.
F. In May of 1993, a newly employed Shawmut Advisers´ salesman ("the Salesman") suggested to Rothmeier that Shawmut Advisers direct brokerage to certain brokers on the basis of client referrals.
G. During 1993 or at least by mid-1994, Shawmut Advisers´ chief investment officer discussed with Rothmeier the Salesman´s request to direct trades to brokers who provided client referrals. Rothmeier supported the Salesman´s request. As a result, beginning during the second half of 1993, Shawmut Advisers, without disclosure to clients, directed brokerage commissions to certain brokers on the basis of their ability to refer clients to Shawmut Advisers, and not based on research provided by the brokers.
H. In approximately July or August 1994, the Salesman informed Rothmeier that, pursuant to his arrangements with certain brokers, the Salesman agreed to cause Shawmut Advisers to direct a specified amount of brokerage commissions to the brokers per each million dollars of advisory client assets that the brokers referred to the Salesman.
I. At some point in 1994 or 1995, Shawmut Advisers´ research director informed Rothmeier that the brokers selected by the Salesman did not provide sufficient research services to warrant allocating commissions to them as research brokers.
J. In early fall 1994, Rothmeier directed Shawmut Advisers´ commission allocation committee to develop a procedure whereby brokerage commissions could be directed to brokers that referred clients to the firm. As a result, an exception to the brokerage allocation procedures was adopted by the committee in September 1994, which was used to approve improperly the allocation and direction of brokerage to brokers based on client referrals to the Salesman.
K. In approximately September 1994, Rothmeier reviewed a memorandum from Shawmut Advisers´ in-house legal counsel which warned that any agreement which involved the allocation of brokerage commissions based on client referrals was inappropriate, and that any receipt of "non-research" services must be disclosed. The memorandum also stated that Shawmut Advisers was at risk of being accused of violating the federal securities laws because substantial commissions had been paid to the Salesman´s brokers without any formal analysis of the research services provided by those brokers.
L. Rothmeier attended a September 1994 commission allocation committee meeting at which Shawmut Advisers´ chief investment officer approved commission allocations to the Salesman´s brokers using the new exception procedure.
M. From 1993 through 1996, Shawmut Advisers directed a total of approximately $1,842,702 in client commissions to brokers that were selected by the Salesman on the basis of client referrals.
N. Rothmeier had the authority as Shawmut Advisers´ president to prevent the undisclosed use of brokerage commissions generated by clients´ transactions. Nonetheless, Rothmeier supported the allocation of such brokerage commissions to the Salesman´s brokers based on client referrals, and did not ensure that such practices were disclosed.
Rothmeier Failed to Disclose Shawmut Advisers´ Selection of Brokers Based on Client Referrals in its Amendment to Form ADV
O. Form ADV Part II, Item 12 requires the adviser to describe "the factors considered in selecting brokers and determining the reasonableness of their commissions." Shawmut Advisers' Form ADV, filed on April 1, 1986, as amended during the period at issue, did not disclose Shawmut Advisers´ practice of selecting brokers on the basis of client referrals. Instead, it stated that Shawmut Advisers selected brokers to execute its clients´ transactions on the basis of research the brokers provided.
P. Form ADV Part II, Item 13.B. asks whether the adviser has any arrangements where it "directly or indirectly compensates any person for client referrals," and requires the adviser to describe any such arrangements. Shawmut Advisers' Form ADV, filed on April 1, 1986, as amended during the period at issue, did not disclose Shawmut Advisers´ arrangements to compensate brokers for client referrals with commissions generated from transactions in client accounts. Instead, it stated that it paid a bonus to any employee of a Shawmut Advisers Corporation affiliate who referred a new client to Shawmut Advisers.
Q. Shawmut Advisers filed amendments to its Form ADV on March 28, 1994, September 21, 1994, March 14, 1995 and July 31, 1995. None of the four amendments disclosed its practice of selecting brokers on the basis of client referrals, or its arrangements to compensate brokers for client referrals with commissions generated from transactions in client accounts.
R. Rothmeier, as Shawmut Advisers´ president, was responsible for Shawmut Advisers´ Form ADV filings and signed the four 1994-1995 amendments to Form ADV under oath. By his signature, Rothmeier represented that the information in the amendments, and previously submitted information that had not been amended, was "current, true and complete."
S. Rothmeier knew or had reason to know that Shawmut Advisers´ 1994 and 1995 amendments to Form ADV failed to disclose material information regarding the selection of brokers and the direction of commissions to brokers on the basis of client referrals, as required by Part II, Items 12 and 13 of Form ADV. In addition, Rothmeier failed promptly to amend Shawmut Advisers´ disclosures on Form ADV to reflect the selection of brokers and the direction of commissions to brokers on the basis of client referrals.
Violations
T. As a result of his actions, Rothmeier willfully aided and abetted and caused Shawmut Advisers´ violations of Sections 206(1) and (2) of the Advisers Act.
U. As a result of his willful omission to state material facts in Shawmut Advisers´ 1994 and 1995 amendments to Form ADV, Rothmeier willfully violated Section 207 of the Advisers Act.
V. As a result of his failure promptly to amend Shawmut Advisers´ disclosures on Shawmut Advisers´ Form ADV, Rothmeier willfully aided and abetted and caused Shawmut Advisers´ violations of Section 204 of the Advisers Act and Rule 204-1(b)(1) thereunder.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Rothmeier´s Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED:
A. pursuant to Section 203(k) of the Advisers Act, that Rothmeier cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rule 204-1(b)(1) thereunder;
B. pursuant to Section 203(f) of the Advisers Act, that Rothmeier be, and hereby is, suspended from association with any investment adviser for a period of nine months, effective on the second Monday following the entry of this Order;
C. pursuant to Section 203(i) of the Advisers Act, that Rothmeier shall pay a civil penalty in the amount of $15,000 to the United States Treasury within thirty days of the date of the entry of the Order. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier´s check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Rothmeier as the Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108;
D. Rothmeier shall comply with his undertaking to provide, within thirty days after the expiration of the suspension described in paragraph IV.B., above, an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108, setting forth with particularity the details of his compliance with the suspension.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | An Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings against Rothmeier and others was issued by the Commission on September 9, 1999. |
| 2 | The findings herein are made pursuant to Respondent Rothmeier=s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. |
| 3 | Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor that protects an investment adviser from charges of breach of fiduciary duty for failing to obtain the lowest available commission rate when the adviser uses client brokerage commissions to obtain research and brokerage services from or through a broker-dealer, and discloses such use (and complies with other requirements). Research is generally defined as a product or service that provides lawful and appropriate assistance to a money manager in making investment decisions. See Republic New York Securities Corporation and James Edward Sweeney, Advisers Act Rel. No. 1789, 1999 SEC LEXIS 278 (Feb. 10, 1999); see also 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170, 35 SEC Docket 905, 906-907 (April 23, 1986) ("1986 Soft Dollar Release"). |
http://www.sec.gov/litigation/admin/ia-1867.htm
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