The SEC and the New York Attorney General’s office announced that Barclays Capital Inc. and Credit Suisse Securities (USA) LLC will pay the largest penalties to date for securities violations in connection with their operations of alternative trading systems known as dark pools. During their joint press conference to announce the enforcement actions, Attorney General Eric Schneiderman said the settlements underscored the value of collaboration with the SEC in achieving first-of-their-kind agreements with the firms. He noted that several insiders came forward to report the Barclays violations (In the Matter of Barclays Capital Inc., Release No. 33-10010, January 31, 2016; In the Matter of Credit Suisse Securities [USA] LLC, Release No. 33-10013, January 31, 2016;In the Matter of Credit Suisse Securities [USA] LLC, Release No.33-10014, January 31, 2016).
Barclays admitted wrongdoing and agreed to pay a total of $70 million to the SEC and the NYAG. Credit Suisse fought every step of the way, he added, and ultimately settled the charges by paying $30 million to the SEC, $30 million to the NYAG, and $24.3 million in disgorgement and prejudgment interest.
Dark pools are a subset of ATSs that offer trading services to institutional investors and others that execute large trading interests but do not provide their best-priced orders for inclusion in the consolidated quotation data. SEC Enforcement Director Andrew Ceresney explained that dark pools are not a nefarious operation if they are run correctly. They play a significant role in the equity marketplace. Schneiderman called for tougher regulatory oversight and market reforms to eliminate unfair trading advantages in March 2014, according to an NYAG news release.
Barclays’ violations. In the Barclays matter, the firm represented that it would monitor order flow in its dark pool and run weekly surveillance reports to detect predatory trading, but it did neither. It also sometimes overrode its surveillance tool and allowed aggressive traders to interact with those who had opted to block such trades. In addition, Barclays misrepresented the type and number of market data feeds it used to calculate the national best bid and offer in its dark pool.
Sanctions. Barclays took a number of remedial steps after an internal audit in 2013. It also filed an amended Form ATS with the Commission to provide updated information about its dark pool and override process, and engaged an independent third-party consultant to review its policies, practices, and compliance with the SEC’s rules and regulations. The SEC took these remedial acts into consideration in settling the proceeding. Barclays also was censured and ordered to cease and desist from future violations of the rules and regulations that the dark pool violated.
Credit Suisse’s violations. Credit Suisse represented that it would identify opportunistic or aggressive traders and remove them from the trading pool, but failed to do so during its first year of operation, and also allowed such traders to resume trading using other IDs. In addition, the firm executed over 117 million illegal sub-penny orders, and failed to keep subscriber order information confidential. The SEC said that two of the firm’s ATSs did not operate as advertised and failed to comply with numerous regulatory requirements for several years.
Sanctions. Credit Suisse settled the proceedings without admitting or denying the findings. The SEC took into consideration certain remedial actions the firm had taken, including the discontinuation of the use of order tags that resulted in the acceptance of sub-penny orders, enhancements to protect the confidentiality of customer information, and additional disclosure about its operations to subscribers. The firm was censured and ordered to cease and desist from committing future violations of the rules and regulations that the dark pool violated.
Whistleblowers. During the media briefing, Schneiderman responded to a question about the Barclays whistleblowers. These individuals played a significant role in the investigation, he said, but they are not eligible for an award from the NYAG. Ceresney said the SEC cannot comment on whistleblowers, but those who qualify under the SEC’s whistleblower rules may be eligible for an award between 10 and 30 percent of the money collected in sanctions.
No individuals were charged in the proceeding, but Schneiderman added that no individuals were released from the possibility of an action.
Area of focus. The SEC has brought six actions against ATSs in the last two years, and Ceresney advised that additional investigations are ongoing. This remains an area of focus for the Commission, which has a designated market abuse unit to investigate dark pool and other activities.
Waivers sought. In anticipation of the settlement order, Barclays asked the Division of Corporation for a waiver from making its affiliated entities, Barclays PLC and Barclays Bank PLC, ineligible issuers under Securities Act Rule 405 as a result of the cease and desist order. Barclays also sought a waiver of any disqualification from relying on the exemption provided by Rule 506 of Regulation D. The staff concluded that Barclays had made a showing of good cause and granted the requested waivers from being deemed an ineligible issuer under Rule 405 and from the disqualification provisions of Rule 506(d).
Companies: Barclays Capital Inc.; Credit Suisse Securities [USA] LLC
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