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Family Office Failed to Enforce Restricted List

 

A family office was censured and fined for failing to implement procedures to prevent the misuse of material nonpublic information.  The firm’s business model involved buying small cap stocks and conducting research through contact with insiders and investment bankers.  Because it frequently obtained material nonpublic information, the firm’s policies required the Chief Compliance Officer to maintain a restricted list of companies in which neither the firm nor its covered persons could invest.  The SEC asserts that the CCO did not maintain or timely update a restricted list, relying instead on ad hoc communications and changes to the order management system.  The SEC also faults the firm for relying solely on the CCO because nobody communicated restrictions when he was not in the office or failed to communicate.  Additionally, the SEC faults the firm because it relied on insiders reporting potential restricted securities rather than implementing a monitoring system.  The firm’s owner, founder and managing member owned 60% of the firm’s assets under management.

Compliance is a series of procedures and processes, not a person.  Just because your policies designate a person responsible doesn’t mean you have satisfied your compliance obligation to implement reasonable policies.  It is also notable that the SEC fined this firm for weak policies even though it did not allege that the firm or its principal actually engaged in insider trading. 

Broker-Dealer Ignored Information Barriers for Issuer Share Repurchases

 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.

 

BD and Principal Punished for Failing to Observe Information Barriers (Again)

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).