SEC Sanctions Two Advisers Re Undisclosed Conflicts
Investment advisers, as fiduciaries, are required to disclose material conflicts of interest. Those disclosures should be incorporated into their brochure – Part II of Form ADV. Those obligations, and the repeated failure of advisers to properly disclose material conflicts, are at least part of the reason the number of actions brought against investment advisers have continued to rise in recent years. The Commission’s most recent case in this area focuses not just on a failure to disclose a potential conflict but false representations that helped conceal the conflict. In the Matter of WBI Investments, Inc., Adm. Proc. File No. 3-19904 (August 5, 2020).
Respondents WBI and Millington Securities, Inc. are registered investment advisers. Millington is affiliated with WBI and serves as an introducing broker for that firm’s orders placed on behalf of advisory clients. Those clients included two ETFs. Millington did not charge WBI or its clients explicit commissions for its brokerage services.
Millington was in fact paid for order flow. To execute the orders forwarded by WBI, Millington sent them to a group of executing brokers each day. The orders were executed in large blocks by the group of executing brokers. Millington charged a flat fee for each share of stock purchased or sold, typically $0.0125 for a trade and $0.0150 for an ETF. Stated differently, the firm was paid for order flow. The amounts collected were retained by Millington.
The executing brokers were paid by Millington through a net trading arrangement. Under that arrangement the securities bought or sold in the market were executed at one price and then bought or sold at a different price. The prices were netted with the difference going to the executing brokers.
Clients were told that Millington received payment for order flow in connection with orders placed by WBI on behalf of clients. That arrangement would continue even if an arrangement with another broker might be cheaper for clients, according to the disclosure.
What clients were not told until early 2017 is that the payment for order flow arrangements in general added or subtracted, depending on whether the transaction was a purchase or sale, about $0.02 to $0.03 per share to the market prices received by the executing brokers. Clients were also not told that the arrangement impacted the prices at which WBI’s client orders were executed. Indeed, on three instances in the late fall to early spring time period of 2014 and 2015 Respondents gave assurances that the payment for order flow arrangements did not affect the price at which WBI’s client orders were executed.
The statements made by Respondents were materially misleading. In addition, at the time neither firm had adopted and implemented policies and procedures designed reasonably to prevent such violations. The Order alleges violations of Advisers Act Sections 206(2) and 206(4).
To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. In addition, Millington will pay a penalty of $250,000 while WBI will pay $750,000. The funds will be transferred to the general fund of the U.S. Treasury, subject to Exchange Act Section 21F(g)(3).
