The US Securities and Exchange Commission (SEC) is fining a brokerage firm for receiving undisclosed payments it received to steer business in a particular direction.

Robare Group charged for recommending certain types of investments

No, the case is not related to high frequency trading, where such “payment for order flow” between brokerage firms and various HFT trading venues had existed undisclosed to investors.  This case involves Robare Group, a small Houston-based investment advisor who steered business to a mutual fund that was providing a rebate to the brokerage for every dollar invested.

“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”

SEC filings SEC Enforcement

 

SEC charges against Robare Group

The SEC charges that Robare Group received $440,000 of such payments for investment order flow over an eight year period of time.  The SEC charges that, unknown to investors, Robare Group and its co-owners Mark L. Robare and Jack L. Jones Jr., received an incentive to recommend certain mutual funds providing rebate payments clients over other investment opportunities and generate additional revenue for the firm.

In a press statement, the SEC said it took the enforcement initiative “to shed more light on undisclosed compensation arrangements between investment advisers and brokers.”  Citing a previous Oregon case  as an example of the SEC cracking down on undisclosed payment for order flow and revenue sharing agreements, the case illustrates the importance of conflicts of interest being fully disclosed. The brokerage firm is in a trusting relationship with its client, who relies on them to provide advice on where to place investments.

In high frequency trading, large brokerage firms routinely send stock orders on an exclusive basis to high frequency trading venues, including dark pools, where they received undisclosed compensation. There have been no charges to date related to this issue and the SEC is currently considering regulatory changes that could address this issue.

The same essential set of circumstances exists with the small brokerage firms being charged in this case.  While the brokerage firm did revise its disclosure in December of 2011, those disclosures were inadequate because they stated the firm may receive compensation from third parties when in fact the firm was definitively receiving payments.