The Securities and Exchange Commission said it has settled charges against broker-dealer Liquidnet Inc. for failing to have controls and procedures in place for market access.
The SEC said the alternative trading systems (ATS) operator also failed to protect confidential subscriber trading information and failed to make several required disclosures. As part of the settlement Liquidnet agreed to be censured and to pay a $5 million civil penalty.
“ATS operators account for a significant amount of liquidity in public markets and are part of the fabric of our market structure,” Joseph Sansone, chief of the market abuse unit at the SEC, said. “ATS operators must have controls in place to mitigate risks associated with their systems, such as market access and the potential exposure of confidential subscriber trading information in order to protect investors.”
As an ATS operator, Liquidnet provides market access to non-broker dealers and is subject to the market access rule that requires it to have a system of controls and procedures in place to prevent the entry of order that would exceed the appropriate credit thresholds for its customers. The SEC found that for a number of years, the company violated the market access rule by setting inappropriate credit thresholds, including having a default of $1 billion.
Additionally, federal regulations required that Liquidnet should comply with certain conditions, including having written safeguards and procedures to limit access to confidential subscriber trading information in order to satisfy the applicable ATS exemptions. The SEC found that the company had failed to adequately limit subscriber trading information and had failed to make the required disclosures on certain forms. According to the SEC, Liquidnet also made material misrepresentations to its customers about its market access controls and safeguards to subscriber confidential trading information.
In addition to the censure and fine, the company has agreed to retain an outside consultant to correct the violations and improve its controls and procedures.