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14 Jan 2008

SMH Capital Fined $450 K for Improper Hedge Fund Sales

The Financial Industry Regulatory Authority (FINRA) announced that it has fined a Houston company, SMH Capital Inc., $450,000 for failing to adopt adequate procedures in its prime brokerage and soft dollar services to hedge funds.

As a result, SMH made improper payments of $325,000 in soft dollars to a hedge fund manager. The firm's failures also included drafting and distributing hedge fund sales materials that did not adequately disclose material investment risks to potential hedge fund investors.

In addition to the fine, SMH was ordered to retain an Independent Consultant to conduct a comprehensive review of the adequacy of the firm's policies, systems, procedures and training with regard to its hedge fund operation.
Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement said, "As broker-dealers increasingly provide services to hedge funds, they need to carefully tailor their supervisory systems and procedures to ensure they guard against conflicts of interest that result in securities law violations," Merrill said, "SMH's inadequate procedures resulted in the firm making soft dollar payments without a reasonable inquiry into red flags indicating the payments were improper."

FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States.

In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm.

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