Fund Manager Lied to Board about Affiliate’s Payment-for-Order-Flow Arrangement
The SEC fined a fund manager $1 Million for misleading the Board about execution costs routed through its affiliated broker-dealer. The affiliate broker-dealer established a payment-for-order-flow arrangement with executing brokers whereby it received a payment on all trades. The respondents did disclose to clients and the Board that they would receive compensation. However, they misled the Board by claiming that clients (i.e. the funds) would not pay higher execution costs as result of the arrangement. The SEC asserts that clients were disadvantaged by 2-3 cents per share on each trade. The respondents collected approximately $7.6 Million over the course of four years.
Don’t be tempted to tell the Board what you think it wants to hear. A payment-for-order flow arrangement will prompt the Board to ask questions. It’s a legal arrangement and is fairly common. It’s also permissible to charge clients more than the minimum commission rates, assuming you can demonstrate best execution. One role for the Board is to vet arrangements like this on behalf of investors. In the regulated world, it’s far preferable to ask permission than forgiveness.