SEC Files a Civil Complaint Against a Broker-Dealer for False and Misleading Disclosures Relating to Information Barriers

Who may be interested: Broker-Dealers, Registered Investment Companies.

Quick Take: The SEC filed a complaint in federal court alleging that a broker-dealer made materially false and misleading statements and omissions regarding its information barriers, which were designed to safeguard material nonpublic information (MNPI) of its customers from other parts of its business. 

According to the SEC’s complaint, the broker-dealer and its affiliates operated two businesses, an institutional order execution service and a proprietary trading business, which were represented to have been walled off from each other. As part of its order execution services, the broker-dealer maintained a database containing order details and other MNPI relating to customer orders. From approximately January 2018 to April 2019 the database was functionally accessible by anyone at the broker-dealer and its affiliates through widely known generic login credentials, potentially permitting access by personnel at the proprietary trading business. The broker-dealer's technology systems focused on access to the database only when it was slowing other programs, and not with a view to preventing misuse of MNPI. The SEC’s complaint alleges that despite personnel of the broker-dealer becoming aware of, and having specific discussions regarding this deficiency in August 2018, the broker-dealer failed to correct the deficiency until at least April 2019.

The SEC’s complaint describes how this deficiency rendered a number of statements concerning the establishment of information barriers made by the broker-dealer and its affiliates through public presentations, letters to customers, press releases and responses to customer due diligence questionnaires, materially false and misleading. The complaint alleges that the broker-dealer profited from these statements because it received orders and commissions from customers that it might not otherwise have received had it disclosed the lack of reasonable information barriers established regarding the database.

The SEC’s complaint asserts that the broker-dealer and its parent company violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. Section 17(a)(2) prohibits obtaining money or property by means of an untrue statement of material fact, or by means of an omission to state a material fact necessary to make a statement not misleading in the offer or sale of a security. Section 17(a)(3) prohibits a person from engaging in any transaction or practice which would operate as a fraud on a purchaser in the offer or sale of a security. The SEC’s complaint also alleges that the broker-dealer violated Section 15(g) of the Exchange Act, which requires broker-dealers to adopt policies and procedures reasonably designed to prevent the misuse of MNPI. The SEC’s complaint seeks permanent injunctive relief, disgorgement and civil penalties.

The SEC’s complaint can be found here.