Fund managers that engage in selling efforts must register as broker-dealers unless they can take advantage of the issuer exemption (Rule 3a4-1), which prohibits the receipt of specific transaction-based compensation.
OUR TAKE: You do know that your emails are retained and your conversations are recorded? Right? The bad old ways of hoping you won’t get caught just have no place in the modern regulatory world where compliance officers, clients (and their consultants), and regulators all review sales activity and disclosure.
An interdealer broker agreed to pay $2.5 Million in disgorgement for failing to disclose markups and markdowns on securities traded for clients. According to the SEC, the broker-dealer’s Cash Equity Desk marketed its services as agency only, charging commissions between 1 and 3 cents per share. However, the SEC alleges that during periods of market volatility, the Cash Equity Desk charged additional markups and markdowns on trades without telling clients and then misleading them about actual purchase/sale prices. The conduct also violated its compliance policies. The SEC faults the entire firm for the unlawful misconduct because the employees were “acting within the scope of their authority.”
OUR TAKE: Firms encountering bad conduct by a small number of employees will have a hard time making the “rogue employee” defense. The SEC has increasingly taken a more strict liability approach whereby the firm is liable for all actions of all employees.