The SEC has charged a broker and his customer for conspiring to conceal alleged kickbacks in exchange for preferred IPO and secondary offering allocations. According to the SEC, the defendants agreed that the customer would kick back 24% of his trading profits. The defendants attempted to conceal the scheme by laundering the payments through multiple bank withdrawals of less than $10,000. The SEC maintains that the broker and the client repeatedly lied on compliance certifications about conflicts of interest and payments, which were required by the firms’ policies and procedures that specifically prohibited any type of conflict, allocation or payment scheme.
OUR TAKE: The SEC properly targets the persons that benefited from the scheme, rather than the firms that had adopted relevant policies and procedures and required specific certifications. It is also noteworthy that the SEC charged the enriched client and not just the broker. We believe this case shows the SEC’s continued focus on holding individuals, and not just organizations, accountable for bad behavior.
A large dual registrant agreed to pay over $550,000 in disgorgement, interest and fines for failing to disclose mutual fund revenue sharing received from its clearing broker. The clearing broker agreed to share a percentage of revenues received from mutual funds participating in its NTF program. The SEC charges that this revenue sharing created a conflict of interest whereby the IA/BD had a financial incentive to direct clients to certain funds. The SEC faults the IA/BD for failing to disclose the revenue sharing or the conflict of interest in its Form ADV from 2003 to 2014. The SEC also claims best execution violations in addition to violations of the compliance rule (206(4)-7) for failing to adopt policies and procedures ensuring proper disclosure.
OUR TAKE: The SEC case focuses on failed disclosure and conflict of interest, but the SEC does not present any data showing that the respondent actually invested more in the funds where it received revenue sharing. The SEC does not need to show client harm in order to bring a case for failed disclosure or a weak compliance program.
The SEC commenced enforcement proceedings against a public plan’s former Fixed Income Director and two brokers for a kickback scheme whereby the public official steered brokerage business in exchange for personal gifts. The U.S. Attorney’s Office also announced parallel criminal charges. The SEC alleges the brokers bribed the public official with combined gifts totaling more than $180,000 over a 2-year period, which gifts included jewelry, tickets, trips, restaurants, cocaine, and prostitutes. The SEC also asserts that the 3 respondents conspired to hide the gifts from reporting and disclosure. The SEC charges that the public official breached his fiduciary duty to the public plan and thereby violated the securities laws. The SEC’s Enforcement Director expressed the SEC’s position on public corruption: “This action demonstrates that the SEC will not tolerate public officials who abuse public pension funds to satisfy their own greedy and wanton desires.”
OUR TAKE: The SEC is expanding its regulatory jurisdiction by pursuing public corruption cases. Although the public official’s alleged conduct certainly violated the plan’s policies and state (and federal) laws, the SEC employs a broad application of the fiduciary duty to assert that the conduct amounted to fraud in the purchase or sale of a security. The SEC may use this same legal theory to enforce the DoL’s fiduciary rule.