Wednesday, December 15, 2004
An article in the Wall Street Journal (Dec. 15) discusses an investigation by the SEC and NASD into gifts given by Bank of America to Scott DeSano, who is responsible for stock trading at Fidelity Investments. According to the article, DeSano may have received a much-coveted amateur slot in the prestigious AT&T Pebble Beach Pro-Am tournament through Bank of America, which purchased a corporate sponsorship that gave it the right to have an amateur play. While DeSano reimbursed companies who paid for his expenses at golf tournaments, it does not appear that he did so for the AT&T playing slot. This investigation comes on top of a report (see Investors Business Daily) earlier this week that the SEC has subpoenaed records from Fidelity and Banc of America Securities, a subsidiary of Bank of America, regarding possible steering of securities trading by one brother who worked for Fidelity to his brother at Banc of America Securities.
The issue of gifts from securities firms to mutual fund executives has become a focus of the securities regulators, who are spending more resources on the issue of conflicts of interest that affect the costs borne by investors. Earlier this month, Kevin Quinn, a broker at Jefferies Group, was removed from his position because, among other things, he billed the firm for over $200,000 of expenses for entertaining mutual fund executives when in fact the trips were for his family and friends. According to an article in the New York Times (Dec. 15), the SEC is also looking at Quinn's entertainment of Fidelity executives:"Two Fidelity traders in particular appeared frequently on Mr. Quinn's travel and expense reports, says a person who has seen those records, and Fidelity has begun an internal investigation of the entire trading unit. In at least two instances, the Fidelity traders reimbursed Mr. Quinn for some part of the expenses incurred while Mr. Quinn had already charged Jefferies for the same expenses."
No one is surprised that brokerage firms have used tickets, trips, and other lavish entertainment to win (or keep) favor with mutual funds, which generate enormous annual trading commissions. By one estimate, Fidelity's annual brokerage commissions are in the range of $800 million to $1 billion, so there is a strong incentive to curry favor with the executives of such firms. One irony of the investigation of Mr. DeSano is that he is widely credited with substantially lowering Fidelity's brokerage costs by eliminating soft dollar arrangements and demanding lower trading fees. It may be that he (and many others) view Knicks tickets and golf outings as a perk that does not influence their business decisions, and perhaps it does not. Does your doctor's pen influence her decision on what drug to prescribe? Nevertheless, the SEC is cracking down, and brokerage firms and mutual fund firms will be in line for even more embarrassing headlines. Mr. DeSano reportedly said (boasted?) that he can hit 300 yard drives, and has a 10 handicap. Drive for show, putt for dough. (ph)