In May of this year, the SEC fined Bloomberg Tradebook LLC for $5 million, censured the firm, and issued a cease and desist order for misleading customers about how their orders were routed. Specifically, the SEC found that the Firm made material misrepresentations in regard to order routing. They omitted material facts about how they handled certain customer trade orders.

Summary

In their marketing materials, Bloomberg Tradebook represented that customer orders would be routed by the Firm’s own “advanced” technology. Their materials stated that this technology would route orders based on factors such as price and liquidity.  In reality, the Firm used three unaffiliated broker-dealers to determine the venues to which certain customer “immediate-or-cancel” orders would be routed for execution. Additionally, the Firm was unable to verify execution venue information to customers for more than a million orders routed using the Low Cost Router. For nearly eight years, the Firm conducted this practice but did not disclose this to their customers who were entering in these orders.

The failure to disclose accurate information related to firms’ order routing practices can carry steep penalties. In Bloomberg Tradebook’s case, the issues were not related to the actual conduct. Instead, the SEC asserts a violation of Section 17(a)(2), which makes it unlawful for any person to obtain money in the sale of a security by means of an untrue statement. The SEC believed that this information was material enough to violate anti-fraud provisions.

Key Takeaways

  1. Perform a periodic review of your marketing material to ensure that the disclosures and information are accurate.
  2. Evaluate the flow of information from your firm to the client. Consider where information would be located that may become outdated or inaccurate without verification. This includes statements, welcome packet information, or brochures.
  3. When in doubt, conservatively disclose.

As a broker-dealer or investment advisor, firms have a vital role in the protection of the markets and their clients. Providing false statements causes harm to both clients and the industry and may result in large monetary penalties.

MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.