SEC Sets Aside $5 Million Fine Because Directed Brokerage Rule Was Ambiguous
The SEC has set aside sanctions and a $5 Million fine that NASD imposed on a large fund distributor in connection with directing fund trades to broker-dealers selling the funds. The respondent directed trades to broker-dealers based on targets derived from prior year’s sales. The SEC opined that, although FINRA Rule 2830(k) would prohibit the practice if it occurred today, it was unclear whether the respondent’s directed brokerage program violated the Rule as in effect at the time. The current rule prohibits directed brokerage “conditioned upon” sales but the old rule prohibited directed brokerage as “an inducement or reward.” The SEC indicated that the firm’s program was based on prior year’s sales, included non-negotiable and non-binding targets, and often resulted in directed brokerage either above or below the targets. Also, evidence indicated that the respondent sought compliance with the Rule and discontinued the program when NASD revised the rule to make the practice more restrictive.
OUR TAKE: It appears that the SEC gave a great deal of credit for the respondent’s efforts to comply with a somewhat ambiguous rule including working through industry groups for guidance.