Broker-Dealers: Do You Know How To Keep a Secret?

broker compliance nycThe SEC’s Office of Compliance Inspections and Examinations (OCIE) recently released a report about the results of examinations by the SEC, FINRA and the NYSE of broker-dealers focusing on how BDs keep material nonpublic information (MNPI) from being misused and their information barrier practices under Section 15(g) of the Exchange Act.

Some of the specific concerns noted in the SEC report include:

  • Informal interaction.  Examiners observed undocumented interaction between groups that have MNPI and internal and external groups that have sales and trading responsibilities.
  • Blanket exclusions. At some BDs, senior executives received MNPI with no related monitoring or restrictions. The absence of any documentation combined with executives’ natural motivation to have their business units excel raised serious concerns for examiners.
  • Insufficient controls. Many BDs did not review trading within accounts of institutional customers, asset management affiliates, or retail customers. Others did not conduct any review when MNPI came through business activities outside of investment banking, including employees serving on the boards of directors of public companies, or insiders of companies placing unusual trades.
  • Inadequate monitoring. BDs failed to conduct any focused review of the trading that occurred after traders were provided with MNPI.

The report also highlighted how some BDs are doing it right. Examples of effective practices included developing, monitoring and documenting formal over-the-wall processes, surveillance and monitoring based on historical patterns, and expanding of products and instruments outside investment banking such as loans, credit default swaps, and single stock futures.

The report, coupled with the SEC Division of Market Regulation’s 1990 report can serve as a great outline for a review of your firm’s insider trading processes and procedures.

Eckerle Law offers a highest-quality and cost-effective alternative to the traditional law firm model for a wide variety of transactional and regulatory matters serving all your business law needs. Our experienced attorneys also provide a full range of compliance services for investment advisers, offering compliance tools that are tailored to fit the ever changing regulatory landscape as well as your business needs.

If your company would like to strengthen its business practices, please contact us today so we can leverage our experience to create real-life business and legal solutions to help your business thrive.