SEC’s Recent Admissions Case Muddies Standard


The SEC famously announced last year that it would insist upon admissions in settled cases involving egregious conduct – instead of its long-standing “neither admit nor deny” rubric.  But its recent Scottrade action has the industry wondering if Commission staff are adhering to that standard.

Scottrade entered an Offer of Settlement in administrative proceedings, admitting the Commission’s factual and legal findings of books-and-records violations.  A software code change in March 2006 inadvertently caused Scottrade’s system to omit Error Account trades from its “blue-sheet” reporting to the SEC, and was not disclosed by the firm’s annual compliance testing.

“In general, the Commission uses the EBS system to obtain securities transaction information for one of two purposes: (1) to assist in the examination for and investigation of possible federal securities law violations, primarily involving insider trading or market manipulation; and (2) to conduct market reconstructions, primarily following significant market volatility.”  Release No. 34-44494; File No. S7-12-00  (June 29, 2001).

The error lead to 1,231 inaccurate reports over six years and was not revealed until Commission Staff discovered it in the course of another investigation.  Citing violations of Rules 17a-4 and 17a-25, the Commission issued its C&D order, censuring and fining the firm $2.5 million, and requiring an independent consultant to oversee the fix.

Earlier this year, Chair White reiterated the admissions-standards she’d set out before:

(i)  “Egregious conduct”; (ii)  “Large numbers of investors harmed”; (iii)  “Significant risk to markets or investors”; (iv)  “Particular future threat to investors or markets”; (v)  “Unlawful obstruction of Commission’s processes.”  

Enforcement Director Ceresny mentioned Scottrade as the Commission’s seventh “admissions” case thus far, but largely avoided questions about it’s relation to the new standard.  Later at SIFMA’s annual Compliance & Legal conference, NY Regional Director Andy Calamari touched on the issue, noting this case affected the integrity of the Commission’s data.

In the Matter of Scottrade, Inc., Rel. No. 34-71435, AP File No. 3-15702 (Jan. 29, 2014).

Topics:  Electronic Blue Sheets, Scottrade, SEC, Section 17(a)

Published In: General Business 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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