BD to Pay $5 Million for Using ATS Data in Order Routing Engine

A broker-dealer operating an electronic alternative trading system agreed to pay $5 Million in disgorgement, fines, and interest for using ATS customer data to populate its non-ATS smart order routing engine.  Regulation ATS requires safeguards against using confidential trading data.  According to the SEC, the smart order routing engine marketed by an affiliate had access to, and used, the ATS’s trading information.  Although the affiliate’s customers could not directly see the trading information, the ATS customers did not consent to the use of such information, even though marketing materials suggested that the information would be used.  The SEC asserts that the marketing materials “were used for marketing, not compliance” and “were not a fulsome or adequate means of ensuring” that the ATS customers “consented to, or were notified of” the use of their data.

OUR TAKE: We often hear from a BD or RIA that it should not have regulatory concerns because it is “acting in the best interest of the clients.”  However, registrants need to ask: “Which client(s)?”  As a fiduciary, firms cannot favor certain clients over others, at least without very specific and clear disclosure.  Also, marketing materials do not qualify as adequate disclosure documents for compliance purposes.

http://www.sec.gov/litigation/admin/2014/34-72673.pdf