UNITED STATES OF AMERICA
In the Matter of
BREAN MURRAY & CO., INC.,
ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 9(f) OF THE INVESTMENT COMPANY ACT OF 1940
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Section 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Brean Murray & Co., Inc. ("Respondent" or "Brean Murray").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 15(b) of the Securities Exchange Act of 1934, and Section 9(f) of the Investment Company Act of 1940 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. This matter involves improper late trading2 of mutual fund shares by Brean Murray, a registered broker-dealer, on behalf of several of its hedge fund customers who were also engaged in market timing.3 From August 2001 through September 2003, Brean Murray, on behalf of Canary Capital Partners LLC and at least four other hedge fund customers, accepted and executed more than 3,500 trades in dozens of fund families after 4:00 p.m. ET, the time as of which those funds calculated their NAV. Brean Murray received and executed through its clearing broker ("Clearing Firm") nearly all of these trades after 4:30 p.m., and the overwhelming majority after 5:00 p.m. Despite this fact, Brean Murray knew that those trades were receiving that day's NAV as opposed to the next trading day's NAV. This practice violated Rule 22c-1 under the Investment Company Act.
2. Rule 22c-1 prohibits, among others, any dealer in fund securities from selling or redeeming any fund securities except at a price based on the current NAV of the security as next computed after receipt of the order. In essence, Rule 22c-1 prohibits those identified in the Rule from executing a mutual fund trade at that day's NAV if the trade was received after the time as of which the mutual fund has calculated that day's NAV (usually 4:00 p.m. ET). Trades in mutual fund shares received after the time as of which the mutual fund calculates that day's NAV is to be priced at the following day's NAV. Rule 22c-1 seeks to prevent exploitation of post-market close information by some investors at the expense of other investors, and to promote fairness for all mutual fund investors.
3. The Clearing Firm had dealer agreements with the mutual funds whose shares were traded late by Brean Murray's customers. These agreements generally required the Clearing Firm to sell and redeem mutual fund shares only in accordance with the terms and conditions of the current fund prospectus. Most if not all of the mutual funds required trades to be placed prior to 4:00 p.m. ET in order to receive that day's NAV. By executing orders placed after 4:00 p.m. ET at that day's NAV, the Clearing Firm violated Rule 22c-1.
4. Brean Murray & Co., Inc., located in New York, New York, has been registered with the Commission as a broker-dealer since December 1973. Brean Murray is wholly owned by BMI Holding Corporation ("BMI Holding"), a private corporation. Brean Murray cleared its trades through another broker-dealer, the Clearing Firm, on a fully disclosed basis. Brean Murray did not have dealer agreements with the mutual funds.
5. Anthony Brean Murray ("Murray") was, until his death in December 2003, Chairman, President, and Chief Executive Officer of Brean Murray. Murray founded Brean Murray in October 1973, and was the majority shareholder of BMI Holding. Following Murray's death, Murray's widow became the majority owner of BMI Holding.
6. In July 2001, two registered representatives (hereinafter referred to as "the Brokers") joined Brean Murray upon leaving Harmonic Research, Inc. ("Harmonic"), a registered broker-dealer.4 While at Harmonic, the Brokers facilitated market timing transactions for a Bermuda-based hedge fund (referred to as "Hedge Fund A"). Murray specifically hired the Brokers to bring their market timing business to Brean Murray and appointed them co-heads of Brean Murray's newly formed Timing Group. Murray gave each of them the title of Executive Vice President. The Brokers reported directly to Murray.
7. Their primary business activity at Brean Murray was to facilitate market timing on behalf of hedge fund customers by negotiating timing capacity directly with mutual fund complexes. The Brokers approached high-level officers of the mutual fund complexes directly to solicit timing capacity on behalf of their customers and obtained permission to time certain funds under certain agreed upon conditions. They eventually negotiated over $1.8 billion in timing capacity with dozens of mutual fund families.
8. Almost immediately upon joining Brean Murray, the Brokers met with representatives of Canary Investment Management Inc., an investment adviser that managed domestic and offshore hedge funds and whose principal was Edward Stern (collectively "Canary") to discuss establishing a brokerage relationship for the purpose of market timing mutual funds. Accordingly, on July 10, 2001, Murray, the Brokers, and other representatives of Brean Murray met with Canary representatives to discuss the market timing and brokerage services that Brean Murray could provide.
9. Following the meeting Canary opened several Clearing Firm accounts through Brean Murray. Before trading in these accounts began in August 2001, Canary requested from Brean Murray the ability to place its mutual fund orders after 4:00 p.m. Murray and the Brokers were told by employees of the Clearing Firm that Brean Murray could accept orders from Canary after 4:00 p.m., and as late as 5:45 p.m., for entry into the Clearing Firm's electronic mutual fund order entry platform5 for processing at that day's NAV.
10. In August 2001, Brean Murray, through the Brokers, began entering orders directly into the Clearing Firm's platform on behalf of Canary. At first, Canary called the Brokers at around 5:00 p.m. with its mutual fund orders. Over time, Canary placed its mutual fund orders later than 5:00 p.m., and sometimes as late as 5:45 p.m. In fact, Canary called in virtually all of its mutual fund trades to Brean Murray after 4:00 p.m. and Brean Murray processed these trades so that they received that day's NAV. Between August 2001 and March 2003, when Canary transferred its account to an investment adviser that the Brokers had established (the "Investment Adviser"), Brean Murray executed approximately 916 late trades for Canary.
11. Brean Murray used its late trading capability as a marketing tool. For example, after developing the Canary relationship, the Brokers made a pitch for Hedge Fund A's business and used late trading as a selling point. In October 2001, Murray, the Brokers, and another Brean Murray representative went to Bermuda to meet with representatives of Hedge Fund A to make a marketing presentation which, among other things, highlighted Brean Murray's relationship with the Clearing Firm and its ability to trade mutual fund shares until 5:30 p.m. ET. Hedge Fund A had not previously asked Brean Murray for late trading capability.
12. Hedge Fund A began placing late trades with Brean Murray in late November 2001 and developed a market timing strategy specifically for its Brean Murray trading which took into account post-4:00 p.m. information. Between November 2001 and March 2003, Brean Murray executed approximately 918 late trades on behalf of Hedge Fund A.
13. Brean Murray also offered its late trading arrangements to two other hedge funds (referred to as "Hedge Fund B" and "Hedge Fund C"). As with Hedge Fund A, neither Hedge Fund B nor Hedge Fund C had asked Brean Murray for the ability to late trade. Nevertheless, Brean Murray offered these hedge funds the ability to trade until 5:30 p.m. as a service that Brean Murray's Timing Group could provide.
14. The Brokers began entering orders into the Clearing Firm's platform on behalf of Hedge Fund B in January 2002 and on behalf of Hedge Fund C in March 2002. Between January 2002 and March 2003, when Hedge Fund B transferred its account to the Investment Adviser, Brean Murray executed approximately 1108 late trades on behalf of Hedge Fund B. Between March 2002 and September 2003, Brean Murray executed approximately 619 late trades on behalf of Hedge Fund C.
15. While at Brean Murray, the Brokers also engaged in late trading on behalf of Hedge Fund D, a hedge fund that they founded and managed, executing 22 late trades between June 2002 and November 2002.
16. Brean Murray did not charge its hedge fund customers commissions on their trades. Instead, Brean Murray charged a fee pursuant to which customers paid Brean Murray a percentage of the fair market value of the accounts for which the Brokers negotiated timing capacity.6
17. As a result of the conduct described above, Brean Murray willfully7 aided and abetted and caused the Clearing Firm's violations of Rule 22c-1 under the Investment Company Act.
1. Employ an independent consultant ("Independent Consultant") knowledgeable in all aspects of mutual fund transactions, including, but not limited to, the pricing of mutual funds and compliance with Rule 22c-1 under the Investment Company Act, and not unacceptable to the staff of the Philadelphia District Office (PDO): (a) to conduct a review of and make findings regarding Brean Murray's internal controls, policies, practices and procedures, organizational structure, and staffing ("Policies and Procedures") reasonably designed to detect and prevent any future mutual find pricing violations, including violations of Rule 22c-1; (b) to conduct a review of any Policies and Procedures that Brean Murray has adopted and implemented since the activities described in this Order, to determine whether and to what extent there is a need for additional or amended Policies and Procedures designed reasonably to detect and prevent, insofar as practicable, such violations; and (c) to make findings regarding any additional Policies and Procedures which the Independent Consultant believes are necessary to provide reasonable assurance that Brean Murray can detect and prevent any future mutual fund pricing violations, including violations of Rule 22c-1;
2. Cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review;
3. Require, at the conclusion of the Independent Consultant's review of the Policies and Procedures, which in no event will be more than 180 days after the date of entry of the Order, the Independent Consultant to submit to Brean Murray and to the Commission staff a written report regarding Brean Murray's compliance with its Policies and Procedures and the adequacy of those Policies and Procedures. The report shall include a description of the review performed, the conclusions reached and, if necessary, make recommendations for changes in or improvements to the Policies and Procedures and provide a procedure for implementing the recommended changes or improvements;
4. Within 30 days after the date of issuance of the report of the Independent Consultant ("Report Date"), adopt all recommendations contained in the report and remedy any deficiencies in its Policies and Procedures; provided, however, that as to any recommendation that Brean Murray believes is unnecessary or inappropriate, Brean Murray may, within 45 days of the Report Date, advise the Independent Consultant and Commission staff in writing of any recommendations that it considers to be unnecessary or inappropriate. With respect to any recommendation that Brean Murray considers unnecessary or inappropriate, Brean Murray need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose. As to any recommendation on which Brean Murray and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement acceptable to the Commission staff within 90 days of the Report Date. In the event Brean Murray and the Independent Consultant are unable to agree on an alternative proposal acceptable to the Commission staff, Brean Murray will abide by the original recommendation of the Independent Consultant;
5. Within 120 days of the Report Date, submit an affidavit to the Commission staff stating that it has implemented any and all actions recommended by the Independent Consultant, or explaining the circumstances under which it has not implemented such actions;
6. Brean Murray: (a) shall not have the authority to terminate the Independent Consultant without the prior written approval of the Commission staff; (b) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; and (c) shall not be in and shall not have an attorney-client relationship with the Independent Consultant and shall not seek to invoke the attorney-client or any other doctrine or privilege to prevent the Independent Consultant from transmitting any information, reports, or documents to the Commission; and
7. Require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Brean Murray, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Commission's Philadelphia District Office, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Brean Murray, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent's Offer.
Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 15(b) of the Exchange Act, Brean Murray is hereby censured;
B. Pursuant to Section 9(f) of the Investment Company Act, Brean Murray cease and desist from committing or causing any violations and any future violations of Rule 22c-1 under the Investment Company Act;
C. Pursuant to Section 21B of the Exchange Act, Brean Murray shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $150,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Brean Murray as a Respondent in these proceedings, and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Arthur S. Gabinet, District Administrator, Philadelphia District Office, Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106; and
D. Brean Murray shall comply with its undertakings as enumerated in Section III., Undertakings, above.
By the Commission.
Jonathan G. Katz
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