(HedgeCo.Net) Recordkeeping requirements of the federal securities laws require broker-dealers to make and keep current certain books and records, including ledgers or other records reflecting all assets and liabilities. The SEC’s order finds that, from at least 2009 through May 2019, CGMI used an unsubstantiated and unverified method to calculate and record indirect expenses associated with its work as an underwriter. According to the SEC’s order, CGMI calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter and then, using fixed “allocation grids,” divided that amount into specific categories of expenses. The order finds that, upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger. According to the order, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and conducted no review or similar process to verify that this method was reasonable.
“Underwriters serve a critical role as gatekeepers in securities offerings. They perform essential functions, including investor protection and also helping companies access capital to grow and innovate,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement. “Recordkeeping failures such as these, perpetuated over at least a decade, can undermine the viability of those functions. The SEC will continue to vigorously enforce the books and records provisions of the federal securities laws, which are crucial to well-functioning markets.”
The SEC’s order charges CGMI with violating Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. Without admitting or denying the SEC’s findings, CGMI consented to a cease-and-desist order, a censure, and a civil penalty of $2.9 million.