The SEC fined a broker-dealer $1.25 Million for failing to respect required information barriers, thereby allowing the sharing of material nonpublic share buyback information with customers. The SEC alleges that the trading desk that executed issuer share repurchase trades shared order data with another desk that disclosed the information to customers. The head traders of the two desks shared trading intelligence including access to the order management system. The SEC maintains that the information was material to an investment decision because third party customers could use the trade orders as indications of the financial health of the underlying issuer. The SEC charges the firm with violating its own policies on information barriers.
OUR TAKE: It appears that the firm failed to implement a monitoring system to ensure that the trading desks observed information barriers. How firms ensure the protection of material nonpublic information should be part of the annual testing program.
A broker-dealer and its principal were censured and fined for failing to observe information barriers intended to safeguard material nonpublic information contained in research reports. According to the SEC, notwithstanding the BD’s written supervisory procedures, (i) the principal and other employees engaged in active personal trading without pre-approval, (ii) the firm failed to observe information barriers between research and sales, (iii) employees disseminated material information such as price targets to existing and prospective customers, and (iv) the firm failed to prevent trading ahead of research reports or decisions to commence coverage. FINRA had previously cited the firm about similar issues. The SEC alleges violations of Section 15(g) of the Exchange Act, which requires broker-dealers to establish and enforce policies and procedures to prevent the misuse of material nonpublic information.
OUR TAKE: The SEC will bring an enforcement action based on issues raised by other regulators (e.g. FINRA) but not adequately remediated. The regulators will throw the book at recidivists. (see e.g. In re Morgan Stanley).