Sidoti & Company LLC, a Securities and Exchange Commissionregistered brokerdealer, agreed to pay a fine of US $100,ooo to resolve charges that, on multiple occasions from November 2014 through July 2015, it failed to have written policies and procedures to prevent the improper use of material nonpublic information by the firm and its associated persons by an affiliated hedge fund. Moreover, written policies and procedures the firm implemented in July 2015 were not “reasonably designed” to avoid such improper use, alleged the SEC. According to the SEC, from November 2014 through July 2015, Sidoti had written policies and procedures to prevent the misuse of material nonpublic information by its own investment and research department. However, the policies did not preclude its chief executive officer or associated persons from using such information to make investment decisions for an affiliated fund. As a result, charged the SEC, during this time the affiliated fund traded stock that was on Sidoti’s dailyrestricted list on 126 instances. After written policies and procedures were finally adopted in July 2015 that prohibited the affiliated fund from trading in securities on the restricted list and imposed certain physical barriers, there were no procedures to enforce such barriers. Sidoti settled this SEC enforcement action without admitting or denying any findings.
Compliance Weeds: When President Ronald Reagan adopted the Russian proverb “trust, but verify” as his own when negotiating with President Mikhail Gorbachev of the Soviet Union in 1986, he could also have been articulating the essential elements of an effective compliance program. As this SEC action against Sidoti & Company evidences, it is not sufficient for a financial services registrant solely to roll out policies and procedures reasonably designed in theory to ensure compliance with applicable laws and rules and trust that they will be followed. The registrant should endeavor to ensure that the policies and procedures are routinely followed, and that they are working as designed. Otherwise they should be amended.