Broker-Dealer Fined $5 Million for Failing to Disclose That It Used Third-Parties to Execute Trades
The SEC fined an agency broker-dealer $5 Million for misleading customers about how their orders were routed. Despite marketing materials that claimed a smart order routing system based on black-box algorithms, the broker dealer actually routed a large portion of trades to third party broker-dealers that had lower venue costs. The broker-dealer thereby lowered its internal costs and increased its profits without full disclosure to clients. The broker also allegedly misrepresented venue information to clients when the third parties did not report such information. The SEC asserts a violation of Section 17(a)(2), which makes it unlawful for any person to obtain money in the sale of a security by means of an untrue statement.
Why does a broker-dealer cutting internal costs result in a $5 Million fine? The SEC essentially applies fiduciary principles to the broker-dealer. The SEC does not claim that any client paid a higher execution cost. Rather, the Commission asserts that the broker-dealer benefited without full disclosure.