Wedbush Securities Inc. and two senior officers resolved an enforcement action previously filed against them during June 2014 by the Securities and Exchange Commission alleging violations of the SEC’s market access rule (Reg MAR). The two officers are Jeffrey Bell, the former executive vice president of Wedbush’s Correspondent Services Division, and Christina Fillhart, a senior vice president in the same division.
Reg MAR, which mostly became effective on July 14, 2011, requires broker-dealers to ensure that all trades that pass through their connections with exchanges and other trading venues be subject to certain risk filters to help avoid manipulative conduct.
As part of their settlements, Wedbush agreed to pay a fine of US $2.44 million, while the two individual officers agreed to pay a combined fine of US $85,000. Wedbush also agreed to retain a consultant to review its compliance with regulatory requirements related to its market access business, among other matters.
In entering into the settlement, Wedbush admitted to a detailed and expansive itinerary of facts that accompanied the Commission order, as well as expressly acknowledged that its conduct “violated the federal securities laws.” Mr. Bell and Ms. Fillhart did not admit or deny any of the Commission’s findings.
Among other matters, the SEC alleged that from July 2011 until at least January 2013, Wedbush “failed to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the risks associated with its market access business.”
The SEC had alleged that, during the relevant time, Wedbush allowed anonymous foreign traders to send orders involving “billions of shares every month” directly to trading venues without being subject to the required risk filters. According to the SEC, these problems occurred even after SEC staff advised Mr. Bell and Ms. Fillhart of certain concerns regarding one of Wedbush’s largest sponsored access clients just prior to the effective date of Reg MAR.
The SEC also claimed that Wedbush did not have appropriate written supervisory procedures over its market access business, and violated other rules, including Regulation SHO as well as an obligation to preserve certain communications regarding trading instructions. In addition, Wedbush failed to file suspicious activity reports pursuant to the SEC’s anti-money-laundering requirements, claimed the Commission.
In sanctioning Wedbush, the SEC used against the firm comment letters Wedbush had submitted regarding proposed Reg MAR in 2010, as well as a proposed NASDAQ rule change related to market access in 2009. As evidenced by its comment letter regarding Reg MAR, said the SEC, “Wedbush was well aware of the requirements, objectives and importance” of the rule. In connection with its comment letter on NASDAQ’s proposed rule change, the SEC wrote:
[a]lthough proposing certain changes to the Nasdaq proposed rule, [Mr.] Bell and Wedbush stated in the 2009 comment letter that sponsoring non-broker-dealer customers “requires the highest level of due diligence, oversight and controls. In this case, the sponsoring member is also the broker-dealer of record and would be accountable for all the responsibilities as such.” Despite this acknowledgement, one of Wedbush’s largest sponsored access customers was not a broker-dealer registered in the United States, and Wedbush failed to engage in the “highest level of due diligence, oversight and controls.”
In the facts admitted by Wedbush is a statement that the firm “acted willfully.” However, a footnote endeavors to explain the meaning of the phrase:
[a] willful violation of the securities laws means merely “that the person charged with duty knows what he is doing.” … There is no requirement that the actor “also be aware that he is violating one of the [r]ules or Acts.”