SEC penalizes two RIAs $1 million over order flow payments

WBI Investments and Millington Securities, affiliated registered investment advisers based in Red Bank, New Jersey, have settled with the Securities and Exchange Commission and agreed to pay $750,000 and $250,000, respectively, in penalties.

The SEC had charged the two firms with making material misrepresentations to clients about compensation that Millington received in an institutional payment-for-order-flow arrangement for routing client orders to certain brokerage firms for execution.

According to the SEC’s order, WBI and Millington served as advisers to a series of mutual funds and a series of exchange-traded funds, among other clients. Millington, which also served as WBI’s primary introducing broker, agreed to route WBI’s client orders to certain brokerage firms that agreed to pay Millington $0.0125 to $0.0150 per share, which the firms characterized as “payments for order flow.”

The SEC said that, over time, brokerage firms executing WBI’s client trades adjusted the execution prices by $0.02 to $0.03 per share higher for client buy orders and lower for client sell orders. According to the order, Millington and the brokerage firms mutually understood that the adjusted execution prices allowed the brokerage firms to recoup their payments to Millington and generate profits. But on at least three occasions, WBI and Millington “falsely assured the boards of the mutual funds and the ETFs that these institutional payment for order flow arrangements did not adversely affect the funds’ execution prices,” the SEC said.

[More: SEC proposes increasing transparency of mutual fund, ETF reports]

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