On October 8, 2015, the Securities and Exchange Commission charged an investment adviser and a broker dealer for failing to maintain and enforce polices to prevent misuse of material non-public information. Without admitting or denying the charges, the respondents agreed to pay more than $1 million to settle the charges, including disgorgement, penalties and interest.
According to the SEC’s order instituting administrative proceedings, the broker-dealer and the affiliated asset manager repeatedly shared information about their trading positions for an exchange-traded note (ETN) whose market price traded at a premium to its intraday indicative value after new issuances of the note were temporarily suspended. Despite information barriers between the respondents that were in place, the SEC charged, traders from both affiliates met to discuss issues relating to the ETN. This sharing of information, the SEC said, violated the information barriers and created an unfair advantage for the affiliated asset manager.
As a result of the trading of material non-public information, the asset manager profited from a market opportunity that it should not have received, according to the SEC.
Our take. This matter underscores the importance of creating and enforcing information barriers that separate trading and investment management functions. By sharing material non-public information across the barrier, affiliated firms risk a “blending” of information among affiliates, creating opportunities that other market participants did not have. The SEC focused on the fact that the affiliates simply did not enforce written policies and procedures in place. The case is a not so subtle reminder that the SEC views prevention of insider trading as a compliance priority.