A broker-dealer offering "commission-free" trading (the "company") settled SEC charges for material misrepresentations relating to its revenue sources and execution quality, as well as for failure to satisfy its duty of best execution.
According to the SEC Order, while the company offered "commission-free" trading for its customers, it provided execution prices that were inferior to its competitors' due to the "unusually" high amounts that principal trading firms paid to obtain the company's order flow. The SEC found that the company failed to adequately disclose, in various retail communications, its receipt of payment order flow. The SEC also found that the company improperly claimed that its order execution quality matched or beat that of its competitors. The SEC concluded that the company failed to satisfy its duty of "best execution" when the firm did not (i) conduct adequate reviews of the execution quality on customer orders, (ii) compare its execution quality to that of its competitors or (iii) assess the adverse effect of payment for order flow on customer execution.
As a result, the SEC found that the company violated Securities Act Sections 17(a)(2) and 17(a)(3) ("Use of interstate commerce for purpose of fraud or deceit"), as well as Exchange Act Section 17(a) and Rule 17a-4 ("Records to Be Preserved by Certain Exchange Members, Brokers and Dealers") thereunder.
To settle charges, the company agreed to (i) cease and desist from future violations, (ii) a censure, (iii) retain an independent consultant and (iv) pay a $65 million civil money penalty.
Commentary Kyle DeYoung
This case is a reminder for registered entities to make sure their disclosures are adequate and consistent throughout all of their communications with investors, including statements made on their websites. Here, the company included disclosures regarding its payments for order flow in its customer agreements and in its SEC-mandated Rule 606 reports, but omitted this information from the FAQs section of its website describing how the company made its money and from other communications with customers discussing its revenue. The company also made misstatements about its best execution practices in the FAQs section of its website. Registered entities should make sure that they pay as much attention to statements made on their customer facing websites, including the FAQs sections, as they do to statements made in their customer agreements and SEC-required disclosures. The company here paid a stiff price for not doing so.
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