SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance

The Securities and Exchange Commission is ramping up its examination of revenue-sharing arrangements between brokers and investment advisers. It made this announcement in a related administrative order involving advisory firms Focus Point Solutions Inc. and H Group Inc. and their owner Christopher Keil Hicks, who have consented to pay $1.1 million to settle charges that they did not disclose to their clients certain revenue-sharing payments that posed possible conflicts of interests.

Hicks and Focus Point Solutions are accused of not telling clients that in return for specific services, they were getting a portion of the revenues from a brokerage firm that managed mutual funds, which were being recommended to investors. Hicks’ other firm, H Group Inc., allegedly improperly voted on its clients’ behalf to make Focus Point a sub-adviser to one mutual fund (most of that fund’s shareholders were clients of H Group.)

Meantime the New York Stock Exchange has consented to pay $5 million to settle compliance failure charges that allegedly gave some customers an advantage over certain trading information. The Securities and Exchange Commission announced the charges, which are the first of its kind, on September 14. This is also the first financial penalty for an exchange.

According to the Commission, under Regulation NMS, market data cannot be sent to proprietary customers before the same information has been sent out in consolidated feeds, which give quote and trade information to the public. Yet, starting in 2008, the NYSE allegedly violated this regulation over a certain time period when it sent the data through its proprietary feeds first. NYSE also allegedly failed to ensure proper compliance when it did not correctly monitor the proprietary feeds’ speed compared to the speed of the consolidated feeds. According to SEC Enforcement Director Robert Khuzami, even just “milliseconds” of a head start in terms of access to market data “disproportionately disadvantages retail and long-term investors.”

Although the NYSE is settling, it is not denying or admitting to wrongdoing. It and parent NYSE Euronext Inc. (NYX), however, have consented to having an independent party examine their market data delivery systems. On its website NYSE said that the SEC did not accuse it of taking part in any intentional misbehavior or that the data delays had hurt any investors.

Khuzami also recently spoke about the SEC’s other enforcement efforts. At a Practicing Law Institute conference, he said that the Division of Enforcement is doing well. He partially credits its performance to an organizational restructuring that took place in 2010, the agency’s whistleblower program, and stronger investigative work. Khuzami noted that the restructuring generated five specialized units, which has let SEC staff become experts in certain enforcement areas, and, with the help of data-driven analytics, allowed the Commission to look into violations.

Khuzami said that contrary to the idea that his division has not been investigating purported violations that allegedly took place during the 2008 economic crisis, these investigations have been taking place and that 75% of them have gone to litigation. Also, he noted that the SEC has begun a number of initiatives to try to identify additional violations, such as private fund analysis for zombie-funds and looking at whether hedge fund performances are aberrational compared to a certain strategy’s benchmark.

Khuzami also spoke about the SEC whistleblower program that was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, saying that it has already been “successful.” In just one year, August 2011 – 2012, the program has received about 2,870 tips—about 8 a day—with financial fraud, disclosure, market manipulation, and offering fraud among the most common alleged violations named. Khuzami said most tips in the US have from Texas, Florida, New York, and California. Whistleblower fraud tips have also come from abroad.

In re Focus Point Solutions Inc., SEC, Admin. Proc. File No. 3-15011 (PDF)

NYSE fined after some clients got early look at data, Reuters/Yahoo News, September 14, 2012

Division of Enforcement, SEC

More Blog Posts:
SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro’s Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal, Institutional Investor Securities Blog, September 7, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate, Stockbroker Fraud Blog, September 5, 2012

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