Broker, Two Employees Alleged to Violate SEC Market Access Rule

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The Commission’s inspection program, conducted by the Office of Compliance Inspections and Examinations or OCIE, has been the source of a number of enforcement actions. One example is the recently filed case against dark pool operator. In the Matter of Liquidnet, Inc., Adm. Proc. File No. 3-15912 (June 6, 2014), Another is the action brought against Wedbush Securities, Inc. and two of its employees based on claims that the firm failed to comply with the market access rule. In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-15913 (June 6, 2014).

The Respondents are the broker dealer, one of the largest providers of market access in the United States, and Jeffrey Bell and Christina Fillhart. Mr. Bell is an executive vice president of the correspondent serviced division of the firm which is responsible for market access. Ms. Fillhart is a senior vice president in the same division.

The Market Access Rule, adopted in late 2010, generally requires that broker-dealers appropriately control the risks associated with market access to avoid jeopardizing their financial condition, that of others or the integrity and stability of the market. Wedbush had about 50 sponsored access customers that generated average monthly trading volume of 30 billion shares. Several of the firms sponsored access customers had more than 1,000 authorized traders. One had over 10,000 traders. This was one of the most profitable operations of the firm. Most of the customers used either their own proprietary trading platform or that of a third party, leased from a service bureau. Thus most of the orders from Wedbush’s sponsored access customers did not flow through its risk management systems.

Here the Order alleges that the firm violated the Market Access Rule, and the individual Respondents caused the violations, despite a warning from the inspection staff, since:

  • The Rule requires that the firm maintain exclusive control over the risk settings in the trading platforms that customers use to access the markets. For many customers that used non-Wedbush trading platforms, the firm did not have exclusive control because it allowed the customers to have access to determine and make changes to risk setting in the platform.
  • The Rule was designed to eliminate the practice under which broker-dealers providing market access rely on the customer, a third party service provider or others to establish and maintain the pertinent risk controls. Yet Wedbush relied on attestations, a practice which is improper.
  • The Rule provides that the firm granting access must have risk management controls and supervisory procedures that are reasonably designed to prevent the entry of orders that do not comply with all regulatory requirements, such as those of Regulations SHO and NMS. Yet Wedbush failed to have such controls. The firm failed to prevent customers from entering numerous orders that violated Regulations SHO, regarding short sales, and NMS, regarding the routing of ISO orders.
  • The Market Access Rule also requires the broker dealer to have risk management controls and supervisory procedures that are reasonably designed to ensure compliance with all other existing regulatory requirements. Here Wedbush failed to comply with this requirement since it did not have controls and procedures in connection with its market access clients that were reasonably designed to ensure compliance with AML reporting and record keeping requirements.
  • The Rule also requires a broker dealer to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks of the market access business. Specifically, the Rule required that Wedbush have risk management controls and supervisory procedures to restrict access to trading systems and technology that provides access to persons and accounts that are pre-approved and authorized by the firm. Here, however, Wedbush only pre-approved the principles, not the thousands of customers permitted access.
  • The Market Access Rule requires that the firm establish, document and maintain a system for regularly reviewing the effectiveness of its risk management controls and supervisory procedures for market access. Wedbush did not have any written procedures for regularly reviewing such effectiveness.

The Order alleges violations of Exchange Act Section 15(c)(3), 17(a) , 21C(A) and the related rules. The proceeding will be set for hearing.

 

Topics:  Anti-Money Laundering, Bank Secrecy Act, Banks, Broker-Dealer, Brokers, Commodity Pool, CPO, Dark Pool, Enforcement, Enforcement Actions, OCIE, SEC

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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