Published on May 15th, 2014 | Posted in Articles

The Securities and Exchange Commission today charged New York-based Rafferty Capital Markets with illegally facilitating trades for another firm that wasn’t registered as a broker-dealer as required under the federal securities laws.

Rafferty agreed to settle the SEC’s charges by disgorging all of the profits it received in the arrangement with the unregistered firm plus interest and a penalty for a total of nearly $850,000.  The SEC’s investigation is continuing.

According to the SEC’s order instituting settled administrative proceedings, Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm.  While Rafferty held the necessary licenses and processed the trades, it was the unregistered firm that managed the business.  Five of the firm’s employees became registered representatives with Rafferty but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation.  Rafferty had no involvement in the trading or compensation decisions while the registered representatives executed the trades through Rafferty’s systems on behalf of the unregistered firm.  Based on the agreement, Rafferty kept 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

According to the SEC’s order, during the course of this arrangement from May 2009 to February 2010, Rafferty did not preserve communications with its registered representatives working on behalf of the unregistered firm.  Rafferty did not ensure that the unregistered firm performed such recordkeeping duties either.  Due in part to Rafferty’s lack of recordkeeping, one of the registered representatives was able to conceal two trades from Rafferty, which caused its books and records to be inaccurate. 

The SEC’s order finds that Rafferty willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(1) and 17a-4(b)(4).  Rafferty also willfully aided and abetted and caused the unregistered broker-dealer’s violation of Section 15(a) of the Exchange Act.  Without admitting or denying the findings, Rafferty consented to a cease-and-desist order that censures the firm and requires the disgorgement of $637,615 as well as payment of $82,011 in prejudgment interest and a $130,000 penalty. 

The SEC’s investigation has been conducted by Joshua Pater and Daniel Michael with assistance from Adam Bacharach, Caroline Forbes, and Yvette Panetta in the Office of Compliance Inspections and Examinations.  The case has been supervised by Celeste Chase.