In the Matter of Wedbush Securities Inc.

Admin. Proc. File No. 3-15913 (2014)

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In the Matter of Wedbush Securities Inc.

Securities and Exchange Commission
Admin. Proc. File No. 3-15913 (2014)

  • Written by Sharon Feldman, JD

Facts

The Correspondent Services Division of Wedbush Securities Inc. (Wedbush) (defendant) permitted sponsored-access customers (SACs) to send orders to exchanges and other trading venues under Wedbush’s market-participant identifier using non-Wedbush trading platforms. In November 2010, the Securities and Exchange Commission (SEC) (plaintiff) adopted Rule 15c3-5 to require broker-dealers to control the risks associated with market access. Wedbush knew that its sponsored-access business posed regulatory risks: two SACs had given access to a trader who engaged in account intrusion and market manipulation, and the SEC had notified Wedbush of deficient short-sale controls and raised concerns about Wedbush’s largest SAC. Before Rule 15c3-5 took effect, Wedbush obtained statements from trading-platform providers that their risk-management settings were under Wedbush’s direct and exclusive control; however, SACs retained the ability to set and revise risk settings without Wedbush’s knowledge or consent. Wedbush assigned responsibility for market-access controls and procedures to other broker-dealers without doing due diligence or subsequent reviews. Although Wedbush maintained a list of easy-to-borrow securities to comply with short-sale regulations, SACs or platform providers loaded the wrong lists, resulting in the failure of risk settings to prevent naked short sales. Even after Wedbush instructed a provider to close an order route for submitting intermarket sweep orders (ISOs), a SAC enabled the route and submitted ISOs. Wedbush did not implement controls to prevent wash sales and manipulative layering and did not file suspicious-activity reports regarding those activities. Wedbush relied on SACs to approve individual traders for market access, did not directly disable traders, and had no controls to prevent disabled traders from obtaining new trader IDs. Based on an internal-audit report that did not mention market-access controls or procedures, Wedbush’s president certified that Wedbush’s market-access controls and procedures complied with Rule 15c3-5. The SEC accepted Wedbush’s settlement offer and entered an order making findings and imposing remedial sanctions and a cease-and-desist order.

Rule of Law

Issue

Holding and Reasoning ()

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