More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission announced charges on Friday against Los Angeles-based Wedbush Securities Inc., and two officials accused of violating the agency’s market access rule that requires firms to have adequate risk controls in place before providing customers with access to the market.
The SEC’s Enforcement Division alleges that Wedbush, which the agency said has consistently ranked as one of the five largest firms by trading volume on NASDAQ, failed to maintain direct and exclusive control over settings in trading platforms used by its customers to send orders to the markets.
“Wedbush provided market access to overseas traders without preapproval and without ensuring that they complied with U.S. law,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement. “We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders.”
Wedbush did not have the required pre-trade controls, failed to restrict trading access to people whom the firm preapproved and authorized, and did not conduct an adequate annual review of its market access risk management controls, the SEC said.
The Enforcement Division alleges that the firm’s violations of the market access rule were caused by Jeffrey Bell, the former executive vice president in charge of Wedbush’s market access business, and Christina Fillhart, a senior vice president in the market access division.
Wedbush Securities issued a statement the same day stating that it "respectfully disagrees with the assertion in the SEC’s administrative complaint that the firm’s controls and procedures in this area were inadequate."
The firm said in the statemnet that it "believes that its risk management controls and procedures in this area were reasonably designed to achieve compliance with applicable regulatory requirements, and that they were consistent with the rules and guidance given by the SEC and its staff beginning in 2011." As this SEC case demonstrates, Wedbush went on to say, "the SEC’s market access rule continues to evolve. In fact, SEC guidance titled 'Responses to Frequently Asked Questions Concerning Risk Management Controls for Brokers or Dealers with Market Access' was not issued until April 15, 2014. The firm continues to monitor changes to the rule and actively modifies procedures as appropriate."
Wedbush said that in 2011, it "discussed its processes and controls with SEC staff before the market access rule became effective and promptly implemented the SEC staff’s recommendations at the time. The firm also proactively contributed to the process through a constructive comment letter to the SEC in March 2010." In several respects, however, Wedbush went on to say, "the SEC now seeks to impose additional regulatory requirements retroactively, through enforcement proceedings, without giving fair notice of its expectations in advance. Wedbush Securities believes this approach is unfair and fails to serve the goals of securities regulation."
Daniel Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added in the SEC statement that “the market access rule was adopted out of concerns that some broker-dealers did not have effective controls in place for their market access. This enforcement action against Wedbush is a cornerstone of our ongoing efforts to hold accountable any broker-dealers who fail to effectively implement market access controls and procedures.”
According to the SEC’s order instituting administrative proceedings, the violations began in July 2011 and continued into 2013.
Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues by using trading platforms over which Wedbush did not have direct and exclusive control, the SEC said. “Bell was aware of the requirements of the market access rule and should have known that the firm’s risk management controls and supervisory procedures related to market access did not comply with the market access rule. Fillhart also had responsibility for overseeing Wedbush’s market access business and received inquiries by exchanges about potential violations by Wedbush and its customers.”
Despite these red flags, the SEC said that Fillhart did not take adequate steps to prompt the firm to adopt reasonably designed risk management controls.
According to the SEC’s order, in addition to violating the market access rule (Securities Exchange Act Rule 15c3-5), Wedbush violated other regulatory requirements as a result of trading by its market access customers. These violations include Rule 203(b)(1) of Regulation SHO relating to short sales, Rule 611(c) of Regulation NMS related to intermarket sweep orders, Rule 17a-8 concerning anti-money laundering requirements, and Rule 17a-4(b)(4) concerning the preservation of records.
The SEC said that the proceeding before an administrative law judge will determine whether Wedbush willfully violated these provisions of the federal securities laws, and whether Bell and Fillhart were causes of the firm’s violations of the market access rule. The judge also will decide what sanctions, if any, are appropriate, according to the agency.