SEC Settles Insider Trading Claims Against Former Chairman and CEO of Advanced Medical Optics

The Securities and Exchange Commission today announced that it has agreed to resolve its insider trading claims against James V. Mazzo, the former Chairman and Chief Executive Officer of Advanced Medical Optics, Inc. (AMO) for allegedly tipping information about his company’s acquisition to his close personal friend, former professional baseball player Douglas V. DeCinces.

The SEC’s complaint alleged that in October 2008 Mazzo executed a nondisclosure agreement with Abbott Laboratories, Inc., as Abbott explored a potential acquisition of AMO. As talks between AMO and Abbott progressed over the ensuing months, Mazzo provided DeCinces with material, nonpublic information about the acquisition on multiple occasions. The complaint further alleges that DeCinces bought AMO securities numerous times after communicating with Mazzo about the progress of the merger talks. DeCinces also allegedly tipped five of his friends, including a former Baltimore Orioles teammate and a businessman, David L. Parker. DeCinces’s trading resulted in over $1.3 million in alleged ill-gotten gains, and the tippees obtained another $1 million in ill-gotten gains.

“The Commission alleges that Mr. Mazzo, a company insider, repeatedly gifted material, nonpublic information to his friend Mr. DeCinces, who in turn tipped his own friends,” said Kelly L. Gibson, Associate Regional Director for Enforcement in the SEC’s Philadelphia Regional Office. “When it comes to insider trading, the fact that the insider does not directly share in the tippee’s ill-gotten gains does not excuse his decision to benefit a friend at the expense of other shareholders.”

Without admitting or denying the allegations, Mazzo agreed to a final judgment that includes a permanent injunction from violations of the antifraud and tender offer provisions of the Exchange Act, orders Mazzo to pay a civil penalty in the amount of $1.5 million, and imposes a five-year officer-and-director bar. The settlement is subject to final approval by the court.  

DeCinces and four of his tippees already settled the Commission’s insider trading claims against them. The SEC’s litigation against Parker is continuing.  

The litigation is being led by Christopher R. Kelly and supervised by Jennifer C. Barry in the SEC’s Philadelphia Regional Office.

SEC Press Release

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SEC Announces Agenda, Panelists for Staff Roundtable on the Proxy Process

The Securities and Exchange Commission today announced the agenda and panelists for the staff roundtable on the proxy process on November 15, 2018.  

The roundtable, announced in September, will begin at 9:30 a.m. in the auditorium at the SEC headquarters at 100 F Street, N.E., Washington, D.C. and will be open to the public. The event also will be webcast live on the SEC website and archived for later viewing.  

Members of the public who wish to provide their views on the proxy process and related SEC rules, either in advance of or after the roundtable, may submit comments electronically or on paper. [sec:ruling_comment]

Agenda and Panelists

9:30     Opening Statements by Chairman Clayton and Commissioners

10:10     Panel One:  Proxy Voting Mechanics and Technology

Panel One will focus on the current proxy voting and solicitation process for shareholder meetings and recent concerns raised about this process. How can the accuracy, transparency, and efficiency of the proxy voting and solicitation system be improved and what steps should regulators consider to facilitate such improvements? In addition, the panel will discuss how recent technological advances can be used to enhance the voting process and the ability of shareholders to exercise their voting rights.  

Panelists

  • Ken Bertsch, Executive Director, Council of Institutional Investors
  • John Coates, John F. Cogan, Jr. Professor of Law and Economics, Harvard Law School
  • Paul Conn, President, Global Capital Markets, Computershare
  • Lawrence Conover, Vice President, Operations and Services Group, Fidelity Investments
  • Bruce H. Goldfarb, Founder, President and Chief Executive Officer, Okapi Partners
  • David A. Katz, Partner, Wachtell, Lipton, Rosen & Katz 
  • Alexander Lebow, Co-Founder and Chief Legal Officer, A Say Inc.
  • Sherry Moreland, President and Chief Operating Officer, Mediant Communications
  • Robert Schifellite, President, Investor Communication Solutions, Broadridge Financial Solutions
  • Brian L. Schorr, Chief Legal Officer and Partner, Trian Fund Management, L.P.
  • Katie Sevcik, Executive Vice President and Chief Operating Officer, EQ
  • Darla Stuckey, President and Chief Executive Officer, Society of Corporate Governance
  • John Tuttle, Chief Operating Officer and Global Head of Listings, NYSE Group
  • John A. Zecca, Senior Vice President, General Counsel North America and Chief Regulatory Officer, Nasdaq

11:40    Lunch Break

1:15     Panel Two:  Shareholder Proposals – Exploring Effective Shareholder Engagement 

Panel Two will focus on shareholder engagement through the shareholder proposal process. The panelists will discuss, among other things, their experiences with shareholder proposals and the related benefits and costs involved for the company and shareholders. The panel also will consider the application of the shareholder proposal rule and related guidance.

Panelists

  • Ray A. Cameron, Head of Investment Stewardship Team for the Americas Region, Blackrock, Inc.
  • Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP 
  • Michael Garland, Assistant Comptroller, Corporate Governance and Responsible Investment, Office of the Comptroller, New York City
  • Maria Ghazal, Senior Vice President and Counsel, Business Roundtable
  • Jonas Kron, Senior Vice President and Director of Shareholder Advocacy, Trillium Asset Management
  • Aeisha Mastagni, Portfolio Manager, Corporate Governance Unit, California State Teachers’ Retirement System
  • James McRitchie, Publisher, CorpGov.net
  • Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness
  • Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations
  • Dannette Smith, Secretary to the Board of Directors and Senior Deputy General Counsel, UnitedHealth Group

2:45     Break

3:00     Panel Three:  Proxy Advisory Firms – The Current and Future Landscape 

Panel Three will focus on the role of proxy advisory firms and their involvement in the proxy process. The panel will draw from a diverse array of perspectives from proxy advisory firms, institutional investors, the academic community, and corporate issuers. How has the role of proxy advisory firms evolved over time and are there ways in which their role and relationships with institutional investors and issuers can be improved?

Panelists

  • Jonathan Bailey, Managing Director and Head of ESG Investing, Neuberger Berman, LLC
  • Patti Brammer, Corporate Governance Officer, Ohio Public Employees Retirement System
  • Scot Draeger, Vice President, Director of Wealth Management, General Counsel and Chief Compliance Officer, R.M. Davis Private Wealth Management
  • Sean Egan, President and Founding Partner, Egan-Jones Proxy Services
  • Phil Gramm, Visiting Scholar, American Enterprise Institute
  • John Kim, Securities Counsel, General Motors
  • Adam Kokas, Executive Vice President, General Counsel, and Secretary, Atlas Air Worldwide
  • Rakhi Kumar, Senior Managing Director, Head of ESG Investments and Asset Stewardship, State Street Global Advisors
  • Katherine “KT” Rabin, Chief Executive Officer, Glass, Lewis & Co.
  • Gary Retelny, President and Chief Executive Officer, Institutional Shareholder Services Inc.
  • Edward Rock, Martin Lipton Professor of Law and Director, Institute for Corporate Governance & Finance, New York University School of Law

SEC Press Release

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Stock Research Firm and Co-Founders Charged With Deceiving Investors in Supposedly Unbiased Reports

The Securities and Exchange Commission today charged a stock research firm and its co-founders with defrauding investors by issuing reports purportedly based on “unbiased” and “not paid for” research when in reality they received thousands of dollars from issuers as a condition to providing each report.

According to the SEC’s complaint, SeeThruEquity LLC and brothers Ajay and Amit Tandon camouflaged the payments by inviting companies to make a “presentation” at an investor conference in order to receive a research report for free.  SeeThru and the Tandons allegedly collected up to several thousand dollars in conference presentation fees per company, and the issuers regularly had input into the substance of the supposedly unbiased research reports, even including the price targets at times. The SEC alleges that the Tandons often instructed SeeThru analysts to use different, higher price targets for covered issuers than those yielded through purported quantitative analysis, and the price targets contained in SeeThru’s reports were typically more than 300 percent above the current trading price of the stock.

The SEC further alleges that Ajay Tandon, who serves as CEO, frequently traded in the same stocks that SeeThru was evaluating despite stating in published interviews and elsewhere that neither the firm nor its principals traded in securities for which they published research.  According to the SEC’s complaint, Tandon also engaged in scalping, which is a form of securities fraud that occurs when a perpetrator makes a stock recommendation to investors and contemporaneously trades against that very recommendation in the open market without adequate disclosure.

“There is a clear line between paid advertising and unbiased research coverage, and we allege that SeeThru and its co-founders crossed it to deceive investors and make money,” said Richard R. Best, Director of the SEC’s Atlanta Regional Office.  “According to our complaint, Ajay Tandon even scalped multiple issuers, further revealing the biased nature of SeeThru’s research reports.”

The SEC’s complaint, which was filed in federal court in Manhattan, charges Ajay Tandon and SeeThru with violating the antifraud provisions of the federal securities laws, and charges Ajay and Amit Tandon with aiding and abetting certain violations by SeeThru.  The SEC seeks permanent injunctions, a conduct-based injunction that would bar the Tandons and SeeThru from promoting the issuer of any security, and disgorgement of ill-gotten gains plus interest, penalties, officer-and-director bars, and penny stock bars.

The SEC’s litigation will be led by Pat Huddleston II and Paul Kim of the Atlanta office, and the ongoing investigation is being conducted by Joshua M. Dickman and supervised by Natalie M. Brunson of the Atlanta office.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Charges EtherDelta Founder With Operating an Unregistered Exchange

The Securities and Exchange Commission today announced settled charges against Zachary Coburn, the founder of EtherDelta, a digital “token” trading platform. This is the SEC’s first enforcement action based on findings that such a platform operated as an unregistered national securities exchange.

According to the SEC’s order, EtherDelta is an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in Initial Coin Offerings (ICOs). The order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange.

EtherDelta provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” run on the Ethereum blockchain. EtherDelta’s smart contract was coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade.

Over an 18-month period, EtherDelta’s users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws. Almost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption. EtherDelta offered trading of various digital asset securities and failed to register as an exchange or operate pursuant to an exemption.

“EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “But to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.”

The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.

Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty. The Commission’s order recognizes Coburn’s cooperation, which the Commission considered in determining not to impose a greater penalty.

The SEC’s investigation, which is continuing, is being conducted by Daphna A. Waxman of the Division’s Cyber Unit and Alison R. Levine and Jorge G. Tenreiro of the New York Regional Office. The case is being supervised by Robert A. Cohen, Cyber Unit Chief. 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

Investor Testing of the Proposed Relationship Summary for Investment Advisers and Broker-Dealers

In connection with our ongoing efforts to help address investor confusion about the nature of their relationships with investment advisers and broker-dealers, the SEC’s Office of the Investor Advocate today made available a report on investor testing conducted by the RAND Corporation.  The investor testing gathered feedback on a sample Relationship Summary issued in April 2018 as part of a package of proposed rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers. The report is available for review and comment on the SEC’s website.

“Based on my discussions with many retail investors over the last several months, it is clear to me that too many retail investors are not aware of the material aspects of their relationships with their investment professionals,” said SEC Chairman Jay Clayton.  “The results of RAND Corporation’s investor testing support our efforts to provide retail investors with a clear and concise Relationship Summary to help them make important decisions about choosing to work with an investment professional.  The SEC staff is carefully reviewing RAND Corporation’s investor testing report as well as other information related to the proposed Relationship Summary that is available in the comment file.”

RAND Corporation’s investor testing of the Relationship Summary consisted of:

  • A nationwide online survey of over 1,800 individuals fielded through RAND’s nationally representative American Life Panel
  • Qualitative in-depth interviews conducted in Denver and Pittsburgh fielded using independent market research firms

This report may be informative to those evaluating the proposed Relationship Summary.  This report may supplement other information considered in connection with the final rule, and the Office of Investor Advocate is making this report available to allow the public to consider and comment on this supplemental information.  Comments on this supplemental information may be submitted to comment File Nos. S7-08-18, S7-09-18, and S7-07-18 and are encouraged by Dec. 7, 2018.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Charges ITG With Misleading Dark Pool Subscribers

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities Inc. have agreed to pay $12 million to settle charges arising from ITG’s misstatements and omissions about the operation of the firm’s dark pool, POSIT, and ITG’s failure to establish adequate safeguards and procedures to protect POSIT subscribers’ confidential trading information.

The SEC’s order finds that despite assuring subscribers that it would maintain the confidentiality of their trading information, ITG improperly disclosed the confidential dark pool trading information of firm clients.  For example, from 2010 to 2015, ITG sent daily Top 100 Reports for the prior day’s trading activity.  The reports identified the top 100 stocks for which certain orders were submitted to POSIT and the top 100 stocks for which certain orders were executed.  ITG informed some high frequency trading firms that they could use these Top 100 Reports to identify “potential unsatisfied liquidity needs” in the dark pool, despite assuring subscribers that ITG would not signal their trading intentions.

According to the SEC’s order, ITG misleadingly omitted important structural features of the dark pool.  From 2010 to mid-2014, ITG split the dark pool into two separate pools, which prevented certain orders in the two pools from interacting with one another.  ITG failed to disclose the separate pools, which had different performance and fill rates, despite specific questions from subscribers about whether ITG “tiered” or segmented the dark pool in any way.  The SEC’s order further finds that from mid-2014 to late 2016, ITG failed to disclose that the firm applied a “speedbump” to slow down interactions involving orders from certain high frequency trading firms.

“Contrary to assurances it made to dark pool subscribers, ITG failed to ensure that trading information was protected, and in some instances used this information to attempt to grow its business,” said Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Our agency continues to scrutinize dark pools to ensure they protect client trading information and operate in compliance with the securities laws.” 

Without admitting or denying the findings, ITG and AlterNet consented to the entry of the SEC’s order finding that they violated the antifraud provisions of the securities laws as well as the rules governing the requirements for dark pools.  The order directs ITG and AlterNet to cease and desist from committing or causing any future violations of those provisions, censures ITG and AlterNet, and orders them to pay the $12 million penalty.

These charges are in addition to charges filed in August 2015 against ITG and AlterNet for operating an undisclosed proprietary trading desk that used confidential customer trading information to trade in the POSIT dark pool.

The SEC’s investigation has been conducted by Rachael Clarke, Scott Thompson, Matthew Koop, and Mandy Sturmfelz of the Market Abuse Unit with the assistance of Julia Green of the Philadelphia Regional Office.  The case has been supervised by Mr. Sansone.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

Citibank to Pay More Than $38 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that Citibank N.A. has agreed to pay $38.7 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. 

The SEC found that Citibank improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring. 

This is the second action against a depositary bank and sixth action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices.  Information about ADRs is available in an SEC Investor Bulletin.

“Our charges against Citibank are the latest in our ongoing investigative effort to hold accountable Wall Street institutions that participated in an industry-wide fraud,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Our investigation into these practices has revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused.”

Without admitting or denying the SEC’s findings, Citibank agreed to pay more than $20.9 million in disgorgement of ill-gotten gains plus $4.2 million in prejudgment interest and a $13.5 million penalty for a total of more than $38.7 million.  The SEC’s order acknowledges Citibank’s remedial acts and cooperation in the investigation.

The SEC’s continuing industry-wide investigation is being conducted by Andrew Dean, Joseph P. Ceglio, William Martin, Elzbieta Wraga, Philip Fortino, Richard Hong, and Adam Grace of the New York Regional Office, and the case is being supervised by Mr. Wadhwa. 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

Anthony S. Kelly, Co-Chief of Asset Management Unit, to Leave SEC After 18 Years of Service

The Securities and Exchange Commission today announced that Anthony S. Kelly, Co-Chief of the Enforcement Division’s Asset Management Unit, will be leaving the agency this month after more than 18 years of service.

The Asset Management Unit is the Division’s largest specialized unit and focuses on misconduct by investment advisers and service providers to mutual funds, ETFs, retail client accounts, hedge funds, and private equity funds. As co-head of the unit for the past two-and-a-half years, Mr. Kelly led a nationwide staff of attorneys, industry experts, and other professionals responsible for conducting investigations across the asset management industry. Co-Chief C. Dabney O’Riordan will continue to lead the unit following Mr. Kelly’s departure. 

“Anthony has shown himself to be a consummate leader and mentor within the Division,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “Through his thoughtfulness and fairness on matters within the fund industry, he exemplifies the best of the Division.  We will truly miss him.”

“As Co-Chief of the Division’s Asset Management Unit, Anthony has spearheaded significant initiatives that protected investors and impacted the behavior of asset managers and investment advisers,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.

Mr. Kelly said, “It has been such an honor to serve as Co-Chief of the Asset Management Unit and work alongside so many smart, energetic, and talented colleagues who are dedicated to protecting investors across the asset management industry. I am extremely proud of all that the unit has accomplished. My time at the SEC and in the Division of Enforcement has been incredibly rewarding thanks to the many wonderful people I have met along the way.” 

During his tenure as co-chief, Mr. Kelly oversaw investigations and enforcement actions covering a broad range of asset management-related and investor protection issues, including conflicts of interest, fund valuation, fund distribution and 12b-1 fees, disclosure, performance advertising, fund governance and the 15(c) process, trading away and best execution, trade allocation, cross trading and principal transactions, investment adviser and broker-dealer registration, whistleblower retaliation, and custody, compliance, and supervision controls. 

Mr. Kelly played a leading role in the unit’s pursuit of fee and expense issues in the private fund industry and supervised the unit’s investigations arising from the Distribution-in-Guise Initiative, which sought to protect investors from bearing the costs when mutual fund advisers improperly used fund assets to pay for distribution-related services rather than making the payments from the firms’ assets. He also coordinated with senior leadership in other SEC divisions and offices on priorities, emerging risks, and rulemakings.  

Mr. Kelly joined the SEC in July 2000 and has served in various roles, including compliance examiner in the broker-dealer group of SEC’s Office of Compliance Inspections and Examinations while attending law school and Special Counsel in the Division of Trading and Markets. Mr. Kelly joined the Division of Enforcement in 2004 following graduation from law school, and joined the Asset Management Unit at its inception in 2010. Mr. Kelly was promoted to Assistant Director in the Asset Management Unit in August 2012, and to Co-Chief in March 2016. He received his undergraduate degree from George Washington University and his law degree from Georgetown University Law Center.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Adopts Rules That Increase Information Brokers Must Provide to Investors on Order Handling

The Securities and Exchange Commission today announced that it has voted to adopt amendments that will require broker-dealers to disclose to investors new and enhanced information about the way they handle investors’ orders.  

“In the eighteen years since the Commission originally adopted its order handling and routing disclosure rules, technology and innovation have driven significant changes in the way that our equities market functions and investors transact,” said Chairman Jay Clayton. “This rule amendment will make it easier for investors to evaluate how their brokers handle their orders and ultimately make more informed choices about the brokers with whom they do business.”

Specifically, the Commission has amended Rule 606 of Regulation NMS to require a broker-dealer, upon a request of a customer who places a “not held” order (e.g., an order in which the customer gives the firm price and time discretion), to provide the customer with a standardized set of individualized disclosures concerning the firm’s handling of the customer’s orders.  The new disclosures will, among other things, provide the customer with information about the average rebates the broker received from, and fees the broker paid to, trading venues.   

The new disclosures are designed to help investors better understand how the broker-dealer routes and handles their orders and assess the impact of their broker-dealers’ routing decisions on order execution quality.  The Commission also adopted two exceptions designed to minimize the implementation costs of the new disclosure requirement on the broker-dealer industry, particularly small broker-dealers.    

Today’s rulemaking also includes enhancements to the quarterly public reports that broker-dealers are already required to publish.  The public disclosures must now describe any terms of payment for order flow arrangements and profit-sharing relationships, among other things.  

 *  *  *

FACT SHEET

Disclosure of Order Handling Information

Nov. 2, 2018

Action

The Securities and Exchange Commission has adopted amendments to Regulation NMS to require additional disclosures by broker-dealers to customers regarding the handling of their orders.  

Highlights of the Adopted Amendments

Customer-Specific Report on Not Held Order Handling 

Newly adopted Rule 606(b)(3) under Regulation NMS will require broker-dealers to provide a customer, upon request, a report on the broker-dealer’s handling of the customer’s NMS stock orders submitted on a not held basis for the prior six months, divided into separate sections for a customer’s directed orders and non-directed orders.  This report will provide a more detailed, standardized, baseline set of disclosures that will help customers that submit not held orders to better understand how their orders are routed and handled by their broker-dealers.  In addition, this report will help customers more effectively assess the impact of their broker-dealers’ order routing decisions on the quality of their executions, including the risks of information leakage and potential conflicts of interest.

The report will include the number of:

  • Shares sent to the broker-dealer;
  • Shares executed by the broker-dealer as principal for its own account; and 
  • Not held orders exposed by the broker-dealer through actionable indications of interest, and the venue or venues to which they were exposed, provided that the identity of such venue or venues may be anonymized if the venue is a customer of the broker-dealer.

The report will also include the following information for each venue to which the broker-dealer routed not held orders for the customer, in the aggregate: 

  • Information on order routing:
    • Total shares routed;
    • Total shares routed marked immediate or cancel;
    • Total shares routed that were further routable; and 
    • Average order size routed. 
  • Information on order execution:
    • Total shares executed;
    • Fill rate (shares executed divided by the shares routed);
    • Average fill size;
    • Average net execution fee or rebate (cents per 100 shares, specified to four decimal places);
    • Total number of shares executed at the midpoint;
    • Percentage of shares executed at the midpoint;
    • Total number of shares executed that were priced on the side of the spread more favorable to the not held order;
    • Percentage of total shares executed that were priced at the side of the spread more favorable to the not held order;
    • Total number of shares executed that were priced on the side of the spread less favorable to the not held order; and 
    • Percentage of total shares executed that were priced on the side of the spread less favorable to the not held order.
  • Information on orders that provided liquidity:
    • Total number of shares executed of orders providing liquidity;
    • Percentage of shares executed of orders providing liquidity;
    • Average time between order entry and execution or cancellation, for orders providing liquidity (in milliseconds); and 
    • Average net execution rebate or fee for shares of orders providing liquidity (cents per 100 shares, specified to four decimal places).
  • Information on orders that removed liquidity:
    • Total number of shares executed of orders removing liquidity;
    • Percentage of shares executed of orders removing liquidity; and 
    • Average net execution fee or rebate for shares of orders removing liquidity (cents per 100 shares, specified to four decimal places).

The requirement to provide a report on the handling of not held orders to customers will be subject to two de minimis exceptions, one at the firm-level and the other at the customer-level.  Specifically, a broker-dealer is not obligated to provide the report to any customer if not held NMS stock orders constitute less than 5% of the total shares of NMS stock orders that the broker-dealer receives from its customers over the prior six months.  In addition, a broker-dealer is not obligated to provide the report to a particular customer if that customer trades through the broker-dealer on average each month for the prior six months less than $1,000,000 of notional value of not held orders in NMS stock.  Under the firm-level de minimis rule, the first time a broker-dealer meets or exceeds the firm-level de minimis threshold, there is a grace period of three months before the broker-dealer becomes subject to Rule 606(b)(3).  This one-time grace period affords a broker-dealer time to develop the systems and processes and organize the resources necessary to generate the Rule 606(b)(3) reports.

To incorporate the new Rule 606(b)(3) report into the existing regulatory structure, the Commission is amending the existing Rule 606(b)(1) customer-specific reports to apply to orders in NMS stock that are submitted on a held basis.  In addition, the Rule 606(b)(1) customer-specific reports will apply to orders in NMS stock that are submitted on a not held basis and for which the broker-dealer is not required to provide the customer a report under Rule 606(b)(3).  The Commission is not otherwise altering the substance of the existing disclosures or the rule’s application to orders for NMS securities that are options contracts.

Held Order Disclosures

The Commission also is enhancing the existing requirement under Rule 606 that broker-dealers provide public quarterly reports on their routing of certain orders.  As amended, the rule requires such reports to cover NMS stock orders of any size that are submitted on a held basis and continue to cover any order, whether held or not held, for an NMS security that is an option contract with a market value less than $50,000.  In addition, broker-dealers will now be required to: 

  • Report routing information separately for marketable limit orders and non-marketable limit orders;
  • Report routing information by calendar month instead of quarterly and no longer categorize NMS stocks by listing market;  
  • Report routing information for NMS stock orders separately for securities included in the S&P 500 Index as of the first day of the quarter and other NMS stocks;
  • Include the following information for the 10 venues to which the largest number of total non-directed orders were routed for execution and for any venue to which five percent or more of non-directed orders were routed for execution: 
    • The net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and per share for: non-directed market orders, non-directed marketable limit orders, non-directed non-marketable limit orders, and other non-directed orders; and
  • Include a description of the terms of any payment for order flow and any profit-sharing arrangements that may influence a broker-dealer’s order routing decision, including, among other things: 
    • Incentives for equaling or exceeding an agreed upon order flow volume threshold;
    • Disincentives for failing to meet an agreed upon minimum order flow threshold;
    • Volume-based tiered payment schedules; and
    • Agreements regarding the minimum amount of order flow that the broker-dealer would send to a venue.

Format and Retention of Reports

The order handling and routing reports required under Rule 606 as amended will be required to be made available using an XML schema and associated PDF renderer published on the Commission’s website.  In addition, the public quarterly order routing report required by Rule 606(a) and the public order execution report required by Rule 605 of Regulation NMS will be required to be posted on a website that is free and readily accessible to the public for a period of three years from the initial date of posting on the website.

Background

In 2000, the Commission proposed and adopted Rule 11Ac1-6, now known as Rule 606 of Regulation NMS, to improve public disclosure of order routing practices.  Limited to smaller-sized orders, it required broker-dealers to provide public quarterly reports on their routing of non-directed orders in NMS securities and to provide customers, upon request, limited customer-specific order routing information.

Since the adoption of Rule 606 of Regulation NMS, routing and execution practices have evolved as markets have become more automated, dispersed and complex.  Today, trading in the U.S. equity markets is spread among a number of highly automated trading centers: 13 registered exchanges, more than 40 alternative trading systems and over 200 over-the-counter market-makers.  Customer orders are regularly routed and executed using sophisticated order execution algorithms that may use a variety of trading strategies, order types, indications of interest and child orders to access these trading centers.  

These market developments have presented a need for Rule 606 to be updated to provide transparency into broker-dealer order handling and routing practices that continues to be useful in today’s automated and vastly more complex national market system.  Rule 606 as amended will provide more meaningful disclosures relevant to today’s marketplace that encourage broker-dealers to provide effective and competitive order handling and routing services, and that improve the ability of their customers to determine the quality of such broker-dealer services.   

What’s Next?

The amendments will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register.  The compliance date will be 180 days from the date of publication in the Federal Register.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Charges Investment Adviser With Running $3.9 Million Fraud

The Securities and Exchange Commission today charged a former registered representative and investment adviser in Altoona, Pennsylvania, with operating a long-running offering fraud.

The SEC’s complaint alleges that Douglas P. Simanski raised over $3.9 million from approximately 27 of his brokerage customers and investment advisory clients, many of them retired or elderly, by telling them that he would invest their money in either a “tax free” fixed rate investment, a rental car company, or one of two coal mining companies in which Simanski claimed to have an ownership interest.  He allegedly told the investors to write checks payable to personal bank and brokerage accounts he opened in his wife’s name.  The complaint alleges that instead of investing the money as he promised, Simanski largely used the money to repay other investors and for his personal use.  According to the complaint, Simanski’s scheme collapsed when one of his clients contacted the Financial Industry Regulatory Authority (FINRA) and Simanski admitted his scheme to his employer.

“This matter highlights the need for retail investors – and retirees and elderly individuals in particular – to remain skeptical of investments that sound too good to be true and confirm that investments recommended by brokers and investment advisers are approved for sale by their respective brokerage or advisory firms before transferring funds,” said Kelly L. Gibson, Associate Regional Director for Enforcement in the SEC’s Philadelphia Regional Office.

In a parallel action, the U.S. Attorney’s Office for the Western District of Pennsylvania today announced that Simanski pleaded guilty to criminal charges.

The SEC’s complaint, filed in federal court in Johnstown, Pennsylvania, charges Simanski with violating antifraud provisions of the federal securities laws.  Simanski has agreed to settle the charges against him.  The settlement, which is subject to court approval, orders injunctive relief and disgorgement of ill-gotten gains plus interest.

Simanski also agreed to the entry of an SEC order that, when entered, will bar him from the securities industry for the rest of his life.

The SEC’s investigation was conducted by Jack Easton and Kingdon Kase in the Philadelphia office with assistance from Karen Klotz, and supervised by Ms. Gibson.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Pennsylvania, U.S. Secret Service, Internal Revenue Service, and FINRA.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com