On August 5, 2020, the SEC announced that it had settled administrative proceedings against two affiliated investment advisers (Advisers) for making material misrepresentations to clients about the effect of compensation they received through payment for order flow arrangements with certain executing broker-dealers (Brokers), and for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.
The Advisers serve as investment advisers to a series of actively managed exchange-traded funds and mutual funds, as well as other clients. To facilitate executing trades on behalf of clients, the Advisers entered into arrangements with the Brokers. Although neither the Advisers nor the Brokers received explicit brokerage commissions for executing trades, under the arrangements the Advisers received payments from the Brokers of between $0.0125 and $0.0150 per share for directing client orders to the Brokers. Between 2014 and 2017 such payments amounted to $7.6 million, which the SEC alleged the Brokers recouped by executing trades on a net basis—in other words, according to the SEC, client trades were executed at prices that were, in general and over time, $0.02 to $0.03 per share higher (for buy orders) or lower (for sell orders) than the market prices received by the Brokers.
The SEC alleged that, although the Advisers disclosed the receipt of payments for order flow arrangements and the conflicts of interest related thereto, the Advisers did not explain that the Brokers would execute trades on a net basis, resulting in clients buying or selling at prices that differed from the market price received by the Brokers. According to the SEC, the Advisers represented to the boards of directors of its fund clients on several occasions that the arrangements did not have an adverse effect on the prices at which trades were executed. The SEC further alleged that the Advisers failed to adopt policies and procedures designed to ensure that disclosures to clients regarding brokerage practices were accurate and complete.
Without admitting or denying the findings, the Advisers agreed to a combined civil penalty of $1,000,000 and consented to the entry of a cease-and-desist order and censures.
The SEC’s announcement and a link to the settlement order are available here..