Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News July 5, 2004 Issue

Charges Dismissed in Shawmut Brokerage-For-Referral Case

It’s a safe bet that Clarke Blizzard is one very happy individual these days.

If his name rings a bell, it’s because Blizzard was the "star salesman" who brought a number of brokerage-for-referral arrangements to Shawmut Investment Advisers (later acquired by Fleet Investment Advisers). In 1999, Fleet, as Shawmut’s successor, settled an SEC enforcement action alleging that the firm failed to disclose the use of commissions to reward referring brokers.

The SEC charged Blizzard with aiding and abetting Shawmut’s violation. The facts, as alleged by the SEC: After joining Shawmut in 1993, Blizzard asked his new employer to allocate commissions to several brokers who, in the past, had referred clients to him. After being told that Shawmut allocated commissions only to brokers that actually provided research, Blizzard arranged for his referring brokers to provide research to Shawmut. The firm’s Director of Research and Manager of Trading, however, raised concerns about the quality of the research.

During a meeting of Shawmut’s Commission Allocation Committee, the Director of Research stated that if commissions were being directed to brokers for new business, that fact should be disclosed in Shawmut’s Form ADV. At the time, Shawmut’s ADV disclosed that Shawmut selected brokers based on execution and research, but did not mention referrals as a factor.

The SEC’s aiding and abetting case against Blizzard went before an SEC administrative law judge (ALJ), who ultimately ordered Blizzard to pay a civil money penalty of $100,000, to disgorge $548,233 plus interest, and to be barred from associating with any investment adviser for 90 days.

Blizzard appealed.

SEC Chairman William Donaldson and Commissioners Harvey Goldschmid and Paul Atkins, who heard his arguments on May 26, dismissed the charges. The jist of their reasoning: Blizzard made no bones about the fact that he was seeking to compensate referring brokers with commissions. While he understood that the practice was controversial within Shawmut, he was under the impression that the appropriate compliance steps were being taken. That didn’t amount to aiding and abetting.

"It is undisputed that [Blizzard’s] job entailed no compliance oversight responsibilities," said the Commissioners in their June 23 opinion. "Blizzard had reason to believe that the question of disclosure was being handled appropriately."

Blizzard wasn’t the only one with his feet to the fire. The ALJ, in her 2003 opinion, had dismissed the enforcement proceeding against Shawmut’s former president, Rudolf Abel, based on an applicable five-year statute of limitations. However, the Division of Enforcement appealed that decision. In their June 23 opinion, the Commissioners said that all but a week of Abel’s conduct was barred, and during that week, his conduct was not so egregious as to warrant an aiding and abetting charge. While they would have liked Abel "to have followed up more aggressively to see that senior management or compliance ensured that the necessary disclosures were made," they said that his conduct during that week did not "constitute awareness that . . . his behavior was part of an activity that was improper." However, they warned, "if a longer period of conduct were considered, we might analyze his liability differently."

Commissioners Cynthia Glassman and Roel Campos did not participate in the opinion.