SEC Charges Broker-Dealer and Associates with Violating Market Structure Rules

This is the first time that the SEC has charged the CEO of a broker-dealer with Market Access Rule violations.

The US Securities and Exchange Commission (SEC) has settled cease and desist proceedings against the CEO of a Utah-based broker-dealer and two other individuals associated with the firm for violating SEC’s market structure rules. Cease and desist proceedings effectively put a stop to purportedly illegal activity.

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Case History

The proceedings involve a former proprietary trader at a Utah-based broker-dealer, Wilson-Davis, the firm’s vice president/head trader and the firm’s CEO and chairman.  

Regulations state that before a broker-dealer effects a short sale, they must locate a source of borrowable securities that can be delivered on the date that delivery is due.  

The rule includes a limited exception for short sales executed in connection with bona fide market making. From November 2011 to May 2013, Wilson-Davis relied on the bona-fide market making exception for all short sales by its proprietary trading group.  

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This reliance was inappropriate for certain Wilson-Davis trades as a major part of Wilson-Davis’s proprietary trading activity was not, in fact, bona-fide market making. However, Wilson-Davis engaged in numerous short sales in over-the counter equity securities which violated regulations and resulted in improper trading profits.

In addition, Wilson-Davis failed to have controls and supervisory procedures in place for its proprietary trading group, as required by the Market Access Rule.

Wilson-Davis’s CEO violated the certification requirement of the Market Access Rule because it was inadequate and he signed it without being familiar with the rule, not being aware of who at the firm was responsible for compliance with it nor making reasonable enquiries about the firm’s annual review and the results of any such review.

Andrew J. Ceresney, Director of the SEC’s Enforcement Division, said: “We allege that Wilson-Davis violated SEC rules that help ensure fair markets, including the rules for short sales and for market access. Public confidence in our markets depends on careful compliance with these market structure rules.”

Penalties

Anthony Kerrigone, the former proprietary trader at Wilson-Davis, consented to the order without admitting or denying the findings and agreed to cease and desist from further violations and repay a total of $550,000, together with a penalty of $50,000.

SEC also found that Byron Barkley, the head trader, caused further violations of the Market Access Rule, and Paul Davis, the CEO, violated the Exchange Act Rule. Both agreed to cease and desist from further violations and repay a total of $76,687 and penalties of $50,000 and $25,000 respectively.

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