An investment bank was fined and censured for failing to enforce information barriers between its research department and an affiliated hedge fund managed by the bank’s CEO. The investment bank maintained policies and procedures related to the misuse of material nonpublic information, including a restricted list applicable to the bank’s employees. However, the restricted list did not stop the hedge fund from making 126 trades in restricted list securities over a 6-month period. In response to deficiencies raised during an SEC examination that occurred before the unlawful trading, the hedge fund adopted policies and procedures that applied the restricted list, required physical barriers, instituted email monitoring, and restricted information flow. The SEC alleges that the hedge fund failed to enforce those policies.
OUR TAKE: Compliance means more than a drafting unused policies and procedures. It means actually enforcing those policies to prevent unlawful conduct. This firm likely incurred the enforcement action because it told the SEC that it had fixed the problem by adopting policies and procedures but then ignored implementation.