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Dual Registrant Over-Charged for Affiliated Brokerage

The acquiror of a formerly dually registered RIA/BD agreed to pay over $5.7 Million because the RIA/BD over-charged its clients for brokerage services.  The SEC maintains that the RIA/BD encouraged clients to select its affiliated brokerage program for trades because of enhanced services and pricing.  However, the SEC alleges, the RIA/BD did not provide any services that clients did not receive when selecting lower-cost brokerage alternatives, and brokerage costs were higher.  Although the firm disclosed that the affiliated broker option resulted in the RIA/BD receiving more compensation, the SEC faults the firm for failing to fully disclose that the clients would have benefited from choosing a different brokerage option.  The conflict of interest violated the antifraud provisions of the Advisers Act. 

Dual registrants that reach for revenue other than the stated asset management fee will draw the attention of the SEC Enforcement Division.  The SEC has attacked dual registrants for revenue sharing, commission splitting, and brokerage practices.  Also, firms looking to do acquisitions should understand that they can’t escape the acquired firm’s previous regulatory lapses. 

SEC Exempts U.S. Firms from European Regulations

The SEC staff has provided no-action relief that allows US advisers and broker-dealers to continue current payment and aggregation practices for research and brokerage notwithstanding impending MiFID II requirements.  The 3 companion No-Action Letters allow (i) broker-dealers to avoid adviser registration even when receiving research payments in hard dollars, (ii) advisers to continue to aggregate orders even though MiFID II may require certain clients to pay more for research, and (iii) broker-dealers to continue to receive bundled commissions.  SEC Chairman Clayton explained that the no-action relief was designed to “reduce confusion and operational difficulties that might arise in the transition to MiFID II’s research provisions.”

OUR TAKE: The No Action Letters are good news for U.S. advisers and broker-dealers, who will not have to change business practices as a result of MiFID II.  The bigger question is how long European regulators will allow U.S. firms a pass.

https://www.sec.gov/news/press-release/2017-200-0