In today's BrokeAndBroker.com Blog, we consider a case in which the Securities and Exchange Commission ("SEC") alleges that an unregistered company engaged in unregistered broker-dealer activity - that's about as bread-and-butter an SEC enforcement matter as the federal regulator could possibly handle. Notwithstanding the seemingly plain vanilla nature of this matter, there are a number of interesting twists and turns.
Yours And Mine
Sometime around the start of 2009, an executive at Rafferty Capital Markets, LLC ("Rafferty"), a registered broker-dealer, proposed that the BD act as the broker-dealer of record for "registered reps" of an unregistered company. Rafferty proposed to hold those registered persons' licenses and assume the attendant liabilities in exchange for a chunk of the commissions. The contemplated arrangement divvied up the various costs and responsibilities, with the unregistered company purportedly on the hook for certain clearing costs, sales commissions, busted trades, etc. Rafferty took on compliance, trade supervision, and other costs/expenses.
In April 2009, Rafferty and the unregistered company entered into a written Services and Cost Sharing Agreement. With the agreement in place, Rafferty registered as "independent representatives" of its firm, five employees of the unregistered company. In exchange, the unregistered company agreed to pay 15% transaction-based compensations.
Once the written agreement between the parties was in place, the five indie reps began executing trades for customers introduced by the unregistered company to Raffery, with the company exercising control over the reps, who worked out of its offices. The unregistered company retained authority over the reps trading and was solely responsible for determining their compensation.
Up to this point, the arrangement is, at worst, iffy. It doesn't necessarily pass the so-called sniff test but depending upon how the regulatory and legal niceties were worked out between the unregistered and registered entities, well, you know, it might have had a chance to pass muster . . . sort of. Unfortunately, the unregistered company held itself out as a broker-dealer, and broker-dealers need to be registered. In some of its marketing materials, the company asserted that it was a:
[B]roker/Dealer trad[ing] securities, focusing on highly structured consumer and nonconsumer ABS, CMBS, and RMBS. It also originates new and existing securitizations.
From May 2009 through February 2010, some 100 buys and 100 sells in asset-backed securities involving over $4 million in compensation went through the pipeline of the arrangement, with Rafferty earning $294,147 in 2009 and $343,468 in 2010.
At first blush to Rafferty, this all may have looked like a nice bit of change, particularly if we keep in mind that 2009 and 2010 came on the heels of the Great Recession, and anyone on the Street would have welcomed additional business. Unfortunately, a few problems cropped up.
The five indie reps used the unregistered company's email addresses and Bloomberg messaging addresses; and Rafferty did not preserve the attendant business-related communications (and did not ensure that the unregistered company did either). Further, in March 2010, one of the indie reps bought and sold a bond on two occasions but the rep purposefully delayed submitting tickets for the two purchases to Rafferty, causing the BD to fail to make and keep current its books and records by failing to timely reflect these transactions in its trade blotters.
Once the SEC got a gander at the goings-on between the unregistered and registered entities, the federal regulator was not at all happy and planned to file charges. In anticipation of the institution of proceedings but without admitting or denying the findings, Rafferty Capital Markets, LLC submitted an Offer of Settlement, which the SEC accepted. In The Matter Of Rafferty Capital Markets, LLC, Respondent,(Securities and Exchange Commission, Order Instituting Administrative and Cease-And-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and A Cease-and-Desist Order; 1934 Release No. 72171; Administrative Proceeding File No. 3-15871 / May 15, 2014). The SEC alleged that Rafferty's conduct willfully violated Section 17(a) of the Exchange Act and Rules 17a-3(a)(1) and 17a-4(b)(4) thereunder and willfully aided and abetted and caused the unregistered company's violation of Section 15(a) of the Exchange Act.
In accordance with the terms of the settlement, the SEC imposed a Censure and ordered Rafferty to