Firm Pays $20 Million for Improper Securities Trading
SEC Releases
Brief Introduction
On April 3rd, a Firm and its Founder agreed to pay $19.3 million in disgorgement, interest, and civil penalties as a result of SEC charges for improper fixed income securities trading.
These charges highlight the importance of a compliance department that not only requires procedures to be followed, but also monitors and advises their business professionals to deter anyone from trying to undermine the intent of policies and procedures.
What Was Discovered By The SEC?
- From 2016 to 2018, clients managed by the Firm sold and purchased bonds from the same company, of which the firm’s clients owned almost 83% of all outstanding bonds.
- These transactions were arranged through “rebalancing” trades made through brokers with the pricing influenced by the firm’s founder, making the trades appear to be at market pricing but were actually not.
- The spreads of the transactions rewarded the brokers but created higher prices for the bonds independent of any true market forces.
- When the trades were reported to pricing services, they were the primary basis for market pricing which then increased the Firm’s Fund NAV and increased fees collected by the firm.
Compliance Analysis
- Cross trades must be valued properly, and Firms should require that the determination for valuation is well documented and easily discoverable for SEC investigators.
- Disclosures should be created to discuss and support any need for cross trading or rebalancing trading, and any possible conflicts of interest in such transactions would also need to be disclosed.
- Compliance departments should have the resources to monitor employees to ensure that they are aware of the underlying purposes of policies and procedures. Many SEC charges occur when employees try to technically follow the instruction of compliance officers but circumvent the underlying purpose of the policies.
Vigilant’s Conclusion
Preventing costly SEC charges requires a compliance department that is well-supported, knowledgeable, and tailored to the requirements of your business.
As the SEC increases their on-site examinations this year, consider having a mock SEC exam completed by experienced professionals to find any costly mistakes before the SEC does.