The Securities and Exchange Commission issued a report by its Office of Compliance Inspections and Examinations intended to help broker-dealers safeguard material non-public information from insider trading and other misuse. The report is a result of the examinations by the SEC of six of the largest broker-dealers and the examinations by the Financial Industry Regulatory Authority and the New York Stock Exchange of an additional thirteen broker-dealers. The report discusses the examination staff’s observations of the policies and procedures, referred to as “information barriers,” that exist at such broker-dealers to ensure that material non-public information is not being misused.
In the course of the examinations the staff noted the following areas of concern:
- Informal and undocumented interaction between groups that have material non-public information and internal and external groups with sales and trading responsibilities that might profit from the misuse of such information;
- Senior executives overseeing a business unit having access to material non-public information from a different business unit that could potentially profit from misuse of that information, with no or limited restrictions or monitoring to prevent such misuse;
- Broker-dealers without risk controls to address the need for information against the restrictions required with respect to discussions between two internal business groups in which material non-public information is provided to one unit for business purposes (e.g., sales, trading or research personnel); and
- Broker-dealers that have gaps in oversight with respect to reviewing the trading in the accounts of institutional customers, retail customers and asset management affiliates or review of firm personnel who receive information through business activities outside of investment banking.
The report provides that the foregoing concerns, by themselves, may not necessarily suggest violations of Section 15(g) of the Exchange Act of 1934, but broker-dealers may find it helpful to consider them in reviewing their policies and procedures. The report also highlights effective practices that the staff observed during the examinations, such as:
- Adopting processes that differentiate between types of material non-public information based on the nature of the information or where it originated;
- Expanding reviews for potential misuse of material non-public information to include reviewing the trading of credit default swaps, equity or total return swaps, loans, components of pooled securities such as unit investment trusts and exchange traded funds, warrants and bond options;
- Using and monitoring electronic sources of confidential information to identify which employees had accessed such information; and
- Monitoring access rights for key cards and computer networks to confirm that only authorized personnel had access to sensitive areas.
Click here to read the Staff Summary Report on Examinations of Information Barriers: Broker-Dealer Practices Under Section 15(g) of the Securities Exchange Act of 1934.