The Securities and Exchange Commission (“SEC”) recently charged Rafferty Capital Markets (“Rafferty”) with illegally facilitating trades for an unregistered broker-dealer. A May 15, 2014 SEC press release details how Rafferty settled an SEC-charged penalty of $850,000 for perpetrating “illegally arranged trades for an unregistered broker-dealer” and keeping “inaccurate books and records” from mid-2009 to early 2010. Numbering at around 100 asset-backed securities trades, Rafferty – a licensed firm who facilitated the trades for the unregistered (and unnamed by the SEC) firm – received 15% of the more than $4 million in compensation produced from the trades.
The deficiencies in Rafferty’s books and records in these illegal trades are particularly noteworthy. During the time of the illegal trading on behalf of the unnamed, unregistered firm, Rafferty was “brokerage of record in name only” for the 100 trades. Five individuals who worked at the unregistered broker-dealer offices registered themselves as brokers at Rafferty, according to the SEC, and “used its systems as the outside firm retained sole authority over their decisions.” This, in turn, led to a lack of internal oversight on the trades made by these acting brokers on behalf of the unregistered firm, ultimately culminating in the five individuals concealing two trades from Rafferty itself, which caused inaccuracies in its own books and records.
These firm-wide issues of lax recordkeeping and untracked communications that compounded with the illegal, unregistered broker trades by Rafferty serve as an excellent example not only of the internal problems produced by unregistered (and therefore unregulated) brokers, but also of the importance of accurate and properly reviewed books and records. As Andrew Calamari, director of the SEC’s New York Office, stated “registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”
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