Investment Advisers Settle SEC Charges for Brokerage Fee Misrepresentations
Two affiliated registered SEC firms, one of which was an adviser and the other, a dually registered adviser and introducing broker, settled SEC charges for making material misrepresentations to the advisers' clients. The misrepresentations pertained to the compensation the firms received for routing advisory client orders to brokerage firms that paid the introducing broker for order flow.
In the Administrative Order, the SEC alleged that one of the advisers sent its client orders to the affiliated introducing broker that sent them on to unaffiliated executing broker-dealers. These unaffiliated broker-dealers added on to the purchase price of any securities (or deducted from the sales price) a payment for the order flow fee that was then paid to the introducing broker. Clients of the adviser were led to believe that this payment for order flow fee was absorbed by the executing brokers, but in reality, the executing brokers recouped the fees through the adjusted executed prices and it was effectively a loss to the advisory clients.
As a result of the two firms' alleged misconduct, the SEC determined that the firms violated Sections 206(2) and 206(4) of the Investment Adviser Act for defrauding their clients and failing to establish and maintain sufficient supervisory procedures to prevent their violations.
To settle the charges, the advisers agreed to (i) cease and desist from further violations, (ii) a censure, and (iii) a combined $1 million penalty.