SEC Hits Two Dark Pool Operators with "Largest-Ever Penalties"
The SEC settled separate charges of federal securities violations against two investment firms operating alternate trading systems ("ATSs"), known as "dark pools." The New York Attorney General also announced actions against the two firms.
Both firms were charged with a number of violations. Specifically, each firm told dark pool users that it provided methods through which users could elect to be matched against only "non-aggressive" orders. Such information was, in many respects, materially false. Additionally, both firms failed to provide adequate protection for the trading information of subscribers. Each firm also was charged with failing to provide complete and updated information on Form ATS.
One firm was charged with providing misleading information about the manner in which it calculated the best price.
The other firm was charged with backing away from firm quotes.
Specifically, the SEC Order determined that one of the firms violated Section 17(a)(2) of the Securities Act, Securities Exchange Act Section 15(c)(3), Rules 15c3-5(c)(1)(i) and 15c3-5(b) of the SEC's Market Access Rule, and Rules 301(b)(2) and (10). The SEC required this firm to (i) pay a $35 million penalty, (ii) cease and desist from continuing violations, and (iii) engage a third-party consultant to review marketing of the product, Market Access Rule compliance and compliance with certain requirements of Regulation ATS.
The SEC found that the other firm violated Section 17(a)(2) of the Securities Act, Rules 301(b)(2), (5) and (10) of Regulation ATS, and Rules 602(b) and 612 of Regulation NMS. The SEC required that this firm (i) cease and desist from continuing violations and (ii) pay $30 million in total penalties, disgorgement of $20,675,510.52 and a prejudgment interest of $3,639,643.39.
SEC Director of Enforcement Andrew Ceresney stressed the "significant role" of dark pools in "today's equity marketplace." "Firms that run these venues must ensure that they do not make misstatements to subscribers about their material operation," he said. "These largest-ever penalties imposed in SEC cases involving two of the largest ATSs show that firms pay a steep price when they mislead subscribers."
New York Attorney General Eric T. Schneiderman also weighed in. "These cases mark the first major victory in the fight to combat fraud in dark pool trading and bring meaningful reforms to protect investors from predatory, high-frequency traders," he said.
