The SEC Scores Another Admission: Scottrade Acknowledges That It Broke Recordkeeping Rules

by Orrick - Securities Litigation and Regulatory Enforcement Group
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http://blogs.orrick.com/securities-litigation/files/2013/05/Magnify-200x150.jpgLast week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges.  In a January 29, 2014 administrative order, the brokerage firm not only agreed  to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data.  This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.

Most civil law enforcement agencies – including the SEC –  generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement.  The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements.  In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible.  Since then, the Commission has obtained admissions in three previous settlements.

The charges against Scottrade pertained to “blue sheets”, which are standardized documents, generated at the Commission’s request, that provide information to the Commission about trades performed by a company or its customers.  In March 2006, Scottrade implemented a change in the coding for the data processing program that handled the firm’s blue sheet requests.  As a result of that change, between March 2006 and April 2012, Scottrade’s blue sheet responses to the SEC failed to report certain trades.  According to the SEC order, Scottrade failed to provide the Commission with correct blue sheet data on 1,231 occasions.  The coding error was discovered when the SEC questioned apparently incomplete trading data it received from Scottrade in December 2011.

In settling the charges, Scottrade not only admitted that its compliance practices were “inadequate,” but also admitted that it “willfully violated” Section 17(a) of the Exchange Act by failing to provide the SEC with correct blue sheet data and to properly maintain and preserve that data.  In addition to admitting wrongdoing, the firm agreed to a $2.5 million penalty and an injunction.  It also agreed to hire an independent consultant to review its record-keeping policies and procedures.

This settlement does little to provide much-needed clarity to market participants and practitioners regarding the scope of the SEC’s new admissions policy.  On its face, the case against Scottrade does not fall neatly within the parameters previously described by the SEC for the kinds of cases in which it will seek an admission of wrongdoing.  There were no allegations of fraudulent or intentional misconduct by Scottrade, and there was no obvious direct impact on investors.  On the other hand, the SEC viewed Scottrade’s six-year failure to correct its errors as “egregious,” and with this settlement sends a message to other broker-dealers to get their records in order.

While this is the first settlement of its kind in 2014, it will almost certainly not be the last.  As indicated by SEC Chair Mary Jo White in a speech last week, we can expect to see more SEC settlements involving admissions in the coming months.

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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