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From Securities Regulation Daily, June 6, 2014

SEC announces two significant market structure enforcement actions

By Jacquelyn Lumb

The SEC today announced two important market structure enforcement proceedings; one a litigated proceeding against Wedbush Securities, Inc. and two individuals for violating the market access rule, and the other a settled proceeding against Liquidnet Inc., the operator of a dark pool alternative trading system for improperly using subscribers’ confidential trading information in marketing its services. During a news briefing about the two cases, Enforcement Director Andrew Ceresney responded to an inquiry about whether the announcement of the cases was linked to SEC Chair Mary Jo White’s landmark speech on market structure issues which she presented yesterday at a conference in New York. He said the cases were not related to her speech and the investigations had been underway for quite some time. He added that the enforcement actions are related to rules that are already on the books, whereas White’s speech addressed new market structure initiatives.

Wedbush Securities, Inc. Wedbush, a market access provider, has ranked among the five largest firms by trading volume on NASDAQ, according to the SEC’s press release. The firm did not have the required pre-trade controls, under which it must preapprove customers who have market access, and did not restrict access to those who had received preapproval and authorization to trade. Ceresney said the firm gave thousands of foreign entities access to the U.S. markets every month without preapprovals and without the appropriate risk settings.

Individuals charged. The Enforcement Division alleges that the firm’s violations were caused by Jeffrey Bell, the former executive vice president in charge of its market access business, and Christina Fillhart, a senior vice president in the market access division. Ceresney said this is the division’s second action under the market access rule and its first charges against individuals under the rule.

Between July 2011 and continuing into 2013, Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues using trading platforms for which the firm did not have direct and exclusive control. The SEC’s order instituting administrative proceedings charges that Bell was aware of the market access rule requirements and should have known that Wedbush’s risk management controls and supervisory procedures were not in compliance. Fillhart had received inquiries from exchanges about potential violations but did not take steps to address those red flags.

In response to a question about the firm’s long history of violations, Ceresney noted that previous actions against the firm are referenced in the order and the firm’s prior history is relevant to the remedies the SEC will seek.

Liquidnet Inc. In the Liquidnet case, the firm violated its regulatory obligations and representations that it made to customers during a three-year period when it allowed a business unit outside of the dark pool operation to access confidential trading data. Ceresney said the safeguarding of customer data is a core requirement of Regulation ATS. Liquidnet, without admitting or denying the SEC’s findings, consented to the order which censures the firm, agreed to pay a $2 million penalty, and agreed to cease and desist from committing the violations.

According to the SEC’s order, Liquidnet created an Equity Capital Markets desk to offer block execution services to corporate issuers, control persons of corporate issuers, private equity, and venture capital firms that wished to execute large transactions with minimal market impact. Liquidnet gave the ECM employees access to the confidential trading information of dark pool subscribers which ECM would then share with issuers.

When asked how clients were harmed by Liquidnet’s actions, Ceresney said there was no allegation of harm to clients, but the purpose of confidentiality is to ensure that clients are not harmed.

Dark pool operators violate the law when they fail to protect their customers’ confidential trading information, according to the SEC’s press release. Liquidnet used the confidential information to expand its business. Ceresney said the division will aggressively pursue broker-dealers that operate ATSs and fail to protect confidential trading information.

Companies: Wedbush Securities Inc.; Liquidnet Inc.

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