On March 14, 2011, the SEC charged JSK Associates, Inc., Jerome Keenan, JSK’s president, and Paul Dos Santos, JSK’s vice president, with failing to disclose to their advisory clients the financial benefits received as a result of cash held in client advisory accounts and from fixed-income trades on a riskless principal basis with advisory clients.
The SEC alleged JSK failed to disclose to advisory clients that, during 2006 through 2010, JSK’s affiliated broker-dealer, International Equity Services, Inc. (“IES”), received a financial benefit in the form of payments based on cash holdings in advisory client accounts. According to the SEC, IES had clearing and custodial arrangements with Southwest Securities, Inc. (“SWS”) and was entitled to receive payments from SWS equal to 0.25% of the average credit balances for JSK’s advisory client accounts that were invested in the AMR Money Market Fund and the average balance of uninvested cash in JSK’s advisory clients’ brokerage accounts. According to the SEC, JSK disclosed that IES might receive forms of compensation such as clearing and processing fees, trail commissions and other revenues which broker-dealers normally receive in the course of doing business, but failed to disclose that compensation based on JSK’s advisory clients’ uninvested cash and certain money market fund balances would be received by IES.
The SEC also alleged that, during the same period, JSK, through IES, engaged in hundreds of fixed-income transactions on a riskless principal basis involving mark-ups and mark-downs with advisory clients without providing prior written disclosure to, or obtaining consent from, the clients. JSK, Keenan and Santos were ordered to pay civil money penalties of $60,000, $10,000 and $10,000, respectively, and to pay disgorgement, on a joint and several basis, of $60,350 and prejudgment interest of $3,805.