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Jul 10, 2007 7:20 pm

[quote=wallstreeter][quote=joedabrkr] [quote=wallstreeter]

[quote=DJRoss]Question, after pounding my head against the wall for almost two years a while back when trying to set up a special fund for US investors via Europe, I ran into this ethics issue of commissions/fees.

We wanted to share the risk with the investors in that if the principal of the funds were ever violated due to poor choices on our traders part, that no fees would be taken on that fund until interest was gained.

We thought by setting a "higher" ethical standard, we would be attractive to potential clients. Imagine my surprise when we ended up playing telephone wars with DC lawyers, NASD and SEC representatives in regards to compliance. Of course we were dead in the water given our unwillingness to compromise. However, after 10 months of futility, we gave up realizing that we were too small and not connected enough to lobby any change to compliance regarding fee waiving policies.

So, the question is if Wallstreeter is telling the truth, how is he and his colleagues able to legally circumvent compliance issues regarding commissions/fees?

Yes, I understand discounting. That goes without saying, but to completely eliminate a commission or fee based on performance benchmarks is what I am talking about.

DJ, Sorry for the confusion.  When I said that we take our commission out, I meant discounting to what basically amounts to covering our overhead.  So, no, it isn't completely eliminated, in essence, we just don't take it home.  It's legal.


So what you're talking about is an informal discounting arrangement, not a formal compensation program.

Correct.  Informal arrangements give you much more latitude and are legal.  It goes something like, "Hey, that trade didn't work the way we thought, let's show you we value your business." 


That'll fool the regualtors. They'll never figure out that you are guaranteeing a profit by not charging a commission for losing trades. Does you sperm donor know that you are here admitting to illegal activity and making outregeous claims about his business? For his sake, quit while you're only a little behind.

Jul 10, 2007 7:49 pm

Honestly this sounds like skirting to me. How do you define an informal arrangement, and when does it become standard praxis in that regulators come down on you?

Not trying to be a jerk about this, but after my experience with regulators, this was driven home rather clearly.

I can see onsies and twosies getting a special deal due to their standing as customers, but to collectively create an informal arrangement that spans the entire portfolio based on performance benchmarks smacks of serious compliance violations.

While the project I was involved in felt that sharing the risk was the proper way to go, there is the basis for existing regulation concerning the welfare of the client. Meaning that it is better for them to take a small hit on fees or commissions vs. lose their wealth due to increased risk taking by brokers who are stressed to meet benchmarks or risk not getting paid. It is a slippery slope to be sure.

Our project was a hedge fund construct using spot market currency strategies. The groundwork for this vehicle has yet to be completed, and has regulatory agencies still scratching their heads somewhat, however the vehicles which you use are well regulated, and there is no question regarding compliance. Given the clarity of compliance that we received regarding our project, it should be even more so for you and yours.

Jul 10, 2007 9:23 pm

Hey, Free Lunch....stockbrokers who do very well by their clients have been snickering for years.  There is less and less competition every year.  Fee based operations are more interested in rules, regulations, allocation, etc. etc. etc. and have no time to learn how to distinguish between companies.

The brokerage company exec's, however, are lining their pockets without any concern about the customer. If they were, there would not be dozens of products too complicated for the average banker to understand.

All people want to do is make money...bottom line...

Take the time to learn ....   you profit from the experience...

Jul 10, 2007 10:32 pm

larmisk, what kind of products are there that are actually that difficult for an average banker to understand? Also stock picking is far from a dead art (I use the term loosely)

The difference is actually that the general public is more informed now than during the ticker tape and quotron days. This means that when picking stocks, you have to not only motivate your reasoning behind it, but be prepared for potential concerns by clients that may have actually done some of their own DD.