Massachusetts securities chief William Galvin launches investigation of broker 'kickbacks'

Says states need to take the lead in securities investigations as Trump moves to cut back financial regulation

Aug 15, 2017 @ 2:33 pm

By Mark Schoeff Jr.

William Galvin
+ Zoom
William Galvin

Massachusetts' top securities regulator, Commonwealth Secretary William Galvin, launched an investigation Tuesday into charges that brokers were receiving 'kickbacks' for routing sales orders to certain stock exchanges.

The probe was inspired in part by a recent New York Times oped by Jonathan Macey, a Yale law professor, and David Swensen, Yale's chief investment officer, who claimed that brokers seeking payment for order flows — instead of choosing the exchange with the best prices for their clients — are taking money out of their clients' pockets.

"Brokers routinely take kickbacks, euphemistically referred to as 'rebates,' for routing orders to a particular exchange," Mr. Macey and Mr. Swensen wrote in a July 18 piece. "As a result, the brokers produce worse outcomes for their institutional investor clients — and therefore, for individual pension beneficiaries, mutual fund investors and insurance policy holders — and ill-gotten gains for the brokers."

Mr. Galvin said in a statement that his office is "looking into the veracity of these assertions."

In an interview, he added that he is also motivated by what he called the Trump administration's effort to cut back financial regulations.

"As it was in previous administrations when this was the attitude, it's up to the states to take the lead," Mr. Galvin said.

He has sent inquiry letters to Charles Schwab & Co. Inc., Scottrade Inc., TD Ameritrade Inc., Fidelity Brokerage Services, E*Trade Securities, Edward D. Jones & Co. and Morgan Stanley & Co. His office did not release the letters.

"Institutional brokers are responsible for placing millions of dollars of average investors' life savings in their employers' pension plans, as well as in mutual funds and variable annuities," Mr. Galvin said in the statement. "If financial rebates or kickbacks create a conflict that results in less than the best deal for the investors, this practice must stop. It is the obligation of regulators to have reasonable assurance that the customer is not being harmed, and that is the reason I instructed my Securities Division to begin this investigation."

The Securities and Exchange Commission has wrestled with best execution for decades. It's a topic that doesn't lend itself to easy solutions, according to Todd Cipperman, principal at Cipperman Compliance Services, because other factors, such as timing and order size, go into calculating best execution.

"There's more to execution than price," Mr. Cipperman said. "Often, the lowest commission is not what determines the best execution. Just because they're paying [a broker] doesn't mean it's not the lowest price. It's a really complicated issue."

In order to protect themselves, Mr. Cipperman recommends that brokers demonstrate why they choose an exchange.

"Make sure you do some best-execution testing so you can justify why you used a particular trading venue," he said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video

Events

Orion's Eric Clarke: What's new at Fuse 2017

Gadget Girl is back on the scene at Fuse with Orion's CEO, Eric Clarke. A new year means new themes and new fintech entrants. Find out what has Orion excited.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Video Spotlight

Path to growth

Video Spotlight

Path to growth

Latest news & opinion

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

What not to say to clients when the markets drop

Here's what advisers should steer clear of saying the next time stocks turn downward.

Nevada fiduciary law raises concerns among retirement professionals, brokerage industry

Critics complain that it conflicts with ERISA and SEC rules and has potential to spur other states to pass their own version of a fiduciary rule.

A special need for financial advice

Advisers don't have to be experts to help special needs families get a jump on lifelong planning.

Broker-dealers and RIAs at loggerheads over fiduciary rule delay

Companies and groups weighing in with comment letters have vastly different viewpoints on the delay's potential impact.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print